Question

Are market efficient? Explain with Mutual Fund Managers’ examples

Answer 1

Markets are not completely efficient or market at not completely inefficient because it can be seen that all the publicly available information is not completely discounted and the the all the privately available information are also not completely discounted but there have been instances when it can be seen that investors have not been able to beat the rate of return of the index on long term basis.

Efficient markets are those markets in which 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 because there is no discrepancy between the price and value and it will also mean that it only passive investment can be preferred as investors can only match the market rate of return they can ever beat it in an Efficient market.

Markets of today are not efficient in nature because there are various instances of fraud and there is hedging and arbitraging possible in the market and there are investors who are outperforming the market as well and they are making higher rate of return so it can be said that market are not completely efficient as of today because of not completely discounting of the informations in stock prices.

When we are taking the example of the mutual fund managers it can be seen that matual fund managers who are actively managing the funds have not been consistently able to beat the index rate of return from a long period of time as it can be reflected through the empirical advances and hence it can be said that mutual fund managers who are only passive managing the fund have a as over the active manager so this will be representing an example of the Efficient market but there are a few managers also have outperformed the index rate of return by huge margin so they will be completely disagreeing with the theory of the Efficient market.

So today's market can be said to be weak form efficient and not strong form efficient