Question

Reflect on the Efficient Markets Hypothesis in light of your experience in managing your portfolio. （Use personal words to explain）

Answer 1

Efficient market hypothesis advocates that all the publicly available information and privately available information have already been discounted into the stock price and there is no scope for making any additional rate of return in the market and this efficient hypothesis will be advocating that there is only scope for passive investment in the market and there is no scope for arbitrage as well so an investor should not be trying to take risk in order to maximize his return through active investment.

When application of Efficient market hypothesis in real life is concerned, if I am managing my portfolio then it can be seen that I can outperform the market if I have adequate and appropriate strategy which is in line with the the market fundamentals and market technical so this is a clear violation of Efficient market hypothesis because in Efficient market hypothesis nobody can make a higher rate of return but in present scenario, there are various different traders and investors were continuously beating the market rate of return.

The market are not efficient on the front that there are various publicly available information which are not discounted in the stock price and insiders are always capitalising upon those privately available informations and hence there are rules which has been formed for curtailment of the insider trading.

So, from my practical experience in real life portfolio management, it can be said that markets have not been efficient enough but they can be semi efficient as they only discount for publicly available information and even fundamental and technical analysis are done in order to maximize the rate of return so there is violation of Efficient market theory in real life.