Question

What is capital market efficiency? What are its implications for investment performance in general? What are the implications for fund managers if we assume markets are semi-strong form efficient?

Answer 1

Capital market efficiency states that markets are efficient, which means stock prices reflect all the available public information. If a news about a recent fraud happening within a company breaks out, then how the stock prices incorporate the news is what is explained by capital market efficiency. Since, the stock price will begin falling, as soon as this news breaks out . In efficient markets since stock prices reflect all news that is available publicly,  no investor is able to earn profits.

The implications of market efficiency on investment performance is that, no investor is able to beat the market. As stock prices, follow a random walk. It is not affected by the past prices but by recent events and news. The stock prices cannot be predicted as any information which can help us make profits are already incorporated in the stock prices.

Markets are semi -strong efficient :

This form of market efficiency believes that the stock prices rapidly adjust to any release of new information about a particular stock so any kind of fundamental, or technical analysis on the stock is useless. So, in this case nothing can help a fund manager earn above-normal returns excepting the access to insider information about stocks.

So, in such a case, a fund manager tries to get his hands on insider information about a stock, which is not available to the public and which can help them pick certain stocks and earn abnormal profits.