Question

Which form(s) of efficient market hypothesis would a passive manager believe? Explain. (Weak form, Semi-Strong Form, or Strong Form)

Answer 1

Passive manager should always be believing into strong form of market because these type of efficiency is always advocate that all the publicly available information have been discounted into this stock price along with privately available information.

strong form of market efficiency advocates that the publicly available information and privately available information have been discounted into the stock price and there are no scope that an investor can make an excess rate of return through active investing so he will have to adopt passive investing to match the rate of return of the index.

Semi strong form of market efficiency advocates that publicly available information have already been discounted into the stock price but privately available information will provide a scope for making excess rate of return because insider will have price sensitive information that will help them in making excess rate of return.

Weak form of market efficiency will advocate that the prices of the current market will reflecting all the historical informations and the past trends. Only fundamental analysis can help in weak form of market efficiency.

Passive investors generally follow the rate of return of the index and they make their portfolio in accordance with the index portfolio and they will be assigning the same proportion and they want to earn the same rate of return so he should always be focusing on the strong form of market efficiency because the strong form of market efficiency will always advocate a passive form of investment.