Question

Mature reflection of the Efficient Markets Hypothesis taking into account the evidence provided during the investment exercise.

Answer 1

The efficient market hypothesis is a hypothesis in financial economies that states that asset prices reflect all available information. A direct implication is that it is impossible to " beat the market" consistently on a risk- adjusted basis.

It is also known as " Efficient market theory". It states that share prices reflect all information and consistent alpha generation is impossible. According to EMH stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore it should be impossible to outperform the overall market through expert stock selection.

There are 3 level or degrees of efficient market hypothesis i.e. weak, semi strong and strong.

- The weak form assumes that current stock prices reflect all available information and the past performance has no reflection with the future.

- The semi strong says that stock prices have factored in all available public information. Due to this it is impossible to use fundamental analysis to choose stocks that will beat the market return.

- Strong form of hypothesis says that all information- public as well as private- is in incorporated into Current stock prices. It is assumed as perfect market.