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In: Finance

Suppose you observed that stock markets usually earn significantly positive returns during January in past years,...

Suppose you observed that stock markets usually earn significantly positive returns during January in past years, and you prepare to follow this strategy in next years. Does it imply that you believe efficient market hypothesis (EMH) or not ? Why ?

Suppose you are a portfolio manager and do active management strategy  (e.g. seek alpha). Does it imply you believe efficient market efficiency or not? Why?

Solutions

Expert Solution

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 by beating the market rate of return.

HENCE, I will NOT be believing in Efficient market hypothesis if I want to earn significant positive return and follow up past strategy which is generated out of public information.

I DONOT believe in Efficient market efficiency if I am an active portfolio manager because Efficient market hypothesis will always advocate for passive investment as it primarily revolves around the theory of never beating the market rate of return whereas active portfolio manager will always be trying to beat the market rate of return so I would not believing in the Efficient market hypothesis.

jeff jeffy answered 2 years ago
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