Question

Investment

briefly explain Efficient Market Hypotheses and their forms weak, semi strong and strong form ? and explain the test of each form and their results ?

Answer 1

Efficient market hypothesis advocates at all the publicly available information and the privately available information have already been discounted into the stock price and there is no scope for making additional rate of return.

strong form of Efficient market hypothesis advocates that all the publicly available information and privately available information have been discounted so only passive investment is possible and there is no possibility of making additional rate of return.

semi efficient form of market advocates that only insider information can make excess money in the stock market because all the publicly available information have been discounted into the stock price

weak form of Efficient market advocates that historical prices and the past trends are discounted into the price and future prices cannot be predicted from the current price

We can test the strong form of Efficient market by looking at whether the privately available information or discounted or not and company is not reacting on the earning report.

we can also test the same efficient form of market by looking at whether the publicly available information are discounted or not and company is not reacting on any kind of information in the public domain

while testing weak form of Efficient market we will make sure that technical analysis completely underperforms.