Question

5) Which form(s) of efficient market hypothesis would a passive manager believe? Explain. (25 pts)

Answer 1

The passive managers believe that its the strongest form of efficient market hypothesis that moves the markets. According to this form of EMH, any information how much ever public or not will be accounted in the stock prices and as a result, the stock prices tend to reflect these information. So no person can take any advantage of the markets by using any infomation he percieves.

In other words the manager who believe this form feel that no investor's return can exceed the normal market returns by any information he possess pertaining to the stock. Thus due to this very factor, the EMH theory claims that no active managers can outperform passive ones in the longer term. May be the actives ones get few chances but the backdrop the passive always win.

Thus passive managers strongly believe that the stock's intrinsic value is the summation of all information absorbed. This is also emphasized in the random walk theory that is an extension derived from the strong form of EMH theory.