Question

Describe the concept of market efficiency in the context of pricing securities. Explain the three different levels of market efficiency

Answer 1

• Market efficiency refers to stock prices and security prices.
• Which reflect relevant information.
• It measures the information of market availability providing maximum amount of opportunities to purchasers and sellers.
• To effect transactions.
• And with out raising transaction costs.
• Successful value investors make money by purchasing stocks that are under valued .
• By selling them when their prices are high or
• Exceed their intrinsic worth.
• Fees charged by active managers are seen as proof.
• Because it stipulates efficient market has low transaction costs.

Market efficiency can be categorized in to three basic levels:-

Weak form EMH:

• Impies that market is efficient reflecting all market information.
• It Assumes that rates of return in market should be independent.
• Rates of return in the past should not effect future rates.

Semi strong EMH:-

• -implies that market is efficient reflecting publicly available information.
• This level assumes that stocks adjust to absorb new information.
• Stock prices reflect new information and
• Investors purchase stocks after the information is released.

Strong form EMH:-

• Implies market is efficient and reflects information both public and private.
• Stock prices reflect all information.
• No investor would be able to make profit above the average investor.
• Even though he was given new information