Question

Are markets fair? Does the average investor have a chance of meeting market returns? Are markets efficient across all investor segments?

Any insight?

Thank you.

Answer 1

We can't say the market is fair as there is a lot of information asymmetry present in the market. The people on the inside always have more information than the people outside of a company. So, one side has an advantage over the other.

Market always works towards getting efficient. For example, if there is an arbitrage opportunity, market would exhaust it till the opportunity is completely eliminated and market becomes efficient again.

What is an efficient market?

An efficient market is one where the market price is an unbiased estimate of the true value of the investment.

Market Efficiency for Investor Groups

• Definitions of market efficiency have to be specific not only about the market that is being considered but also the investor group that is covered.
  • It is extremely unlikely that all markets are efficient to all investors, but it is entirely possible that a particular market (for instance, the New York Stock Exchange) is efficient with respect to the average investor.
  • It is also possible that some markets are efficient while others are not, and that a market is efficient with respect to some investors and not to others. This is a direct consequence of differential tax rates and transactions costs, which confer advantages on some investors relative to others.
• Definitions of market efficiency are also linked up with assumptions about what information is available to investors and reflected in the price. For instance, a strict definition of market efficiency that assumes that all information, public as well as private, is reflected in market prices would imply that even investors with precise inside information will be unable to beat the market.

An immediate and direct implication of an efficient market is that no group of investors should be able to consistently beat the market using a common investment strategy.