Question

what does it mean to say that the stock market is "efficient" in its pricing? identify and explain the three different levels of market efficiency

Answer 1

When the stock market is efficient in its pricing it is suggested that price fully reflects at any given time, all the information about a given stock or market. This is also knows as the efficient marketing hypothesis, which states that no investor has an advantage in predicting the returns of a stock because no one has access to information that is not already available to all.

The three different level of market efficiency are:

1. Weak form: it implies that market is efficient, reflecting all market information. This assumes that the rate of return on market should be independent, past rates of return have no affect on future returns.

2. Semi strins form: This implies that market is efficient, reflecting all public information is available. This form assumes that the stock adjusts quickly to absorb the new information. It also incorporates the weak form hypothesis, which means, a reader cannot benefit over and above the market by using new information.

3. Strong form: This implies, that the market is efficient and reflects both private and public information. It incorporates both weak and semi strong form in it, which means, that the investor cannot profit above the average investor even if given new information.