The Efficient Market Hypothesis, known as EMH in the investment community, is one of the underlying reasons investors may choose a passive investing strategy.

Required:

What is meant by EMH? Explain why efficiency is important for you as a potential investor.
Briefly discuss the forms of market efficiency. Which market efficiency assumed to exist?

Expert Solution

Efficient market hypothesis advocates that all the privately available information and the publicly available informations have already been discounted in the stock price and there is no scope for making an additional rate of return than the market rate of return because intrinsic value will be equal to the current market price. Efficient market hypothesis will always advocate for the passive investment.

Efficiency is important for investor like me because it will provide me with higher transparent market which is not including any kind of insider informations and there is proper reflection of intrinsic value on the current market prices and there is no scope for manipulation of the prices and I will be able to make a higher rate of return in the long run by sticking through passive investment.

Three form of market efficiency are strong form of market efficiency and semi-strong form of market efficiency and weak form of market efficiency.

Strong form of market efficiency will be discounting all the privately available information and publicly available information whereas semi strong form of market efficiency will only discount publicly available information but it will not discount privately available information and weak form of market efficiency will only discount past informations and historical prices.

I think Semi Efficient market form of efficiency is existing currently as there is no discounting of privately available informations in the market

jeff jeffy answered 2 years ago

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