Question

Explain (in a page or more - using own words) why it is easier to diversify in an efficient market, utilizing skills such as Asset Allocation and Correlation?

Explain why the Weak form is the most efficient of the three forms of market efficiency.

Answer 1

1. It is easier to diversify in efficient market because Efficient market will be having a lowered discrepancy of the value with the price and Efficient market will mean that there is a high level of presence of information into the share price as well so there is a discounting of information into share price which will make the intrinsic value close to the current market price.

Hence, diversification will be easy in Efficient market because of lack of discrepancy between intrinsic value and the current market price and it will help the investors in finding out the Asset correlation and allocation to large extent because it will help in better management of the resources as there will be better elimination of the unsystematic risk and presence of diversification.

2. Weak form is the most efficient in all three forms of market because it does not follow with any kind of trend in the market and it also advocates that there is no prediction of the future price from the current price and it is also advocating that no technical analysis can ever sustain in the market as well as fundamental analysis are also null and void so it is trying to relate to the real world and eliminate all kind of possibilities of making higher rate of return rather than theoretical advocating it, it is trying to counter it by elimination of Technical Analysis and fundamental analysis and any kind of momentum driven trading so weak form efficient is the most effective form of Efficient market.