Question

For assessment 5:

Read the 1989 Malkiel article, "Is the Stock Market Efficient," linked in the Resources. In addition, conduct research in the Capella library or the Internet on different perspectives on the Efficient Market Hypothesis. You might try using search terms such as "efficient market hypothesis controversy" and "efficient market hypothesis perspectives" to obtain relevant results.

Use your research to complete the following:

Explain the Efficient Markets Hypothesis (EMH).

Distinguish among the three levels of market efficiency.

Briefly explain the implications of the EMH on financial decisions by individual investors.

Use at least two research resources to support your ideas.

Answer 1

Efficient market hypothesis says that Capital markets around the world are typically very efficient and price in all the information that is available in the public domain. Hence it is very difficult for an individual to beat the return that the stock market gives.

The three levels of efficient market hypothesis are:

1. Weak form: The market is efficient and has incorporated all market information. However, not all public information is priced in by the market

2. Semi-Strong: This means the stock prices on the market are efficient and has priced in all market information and also in addition the public information is priced in.

3. Strong form: This form of market is highly efficient as it considers the market, public information and also prices in private information.

So, in a weak form, investors can beat the market return by taking bets on certain specific sectors. Whereas in the strong form, investors will not be able to beat the market return as marked has priced in everything and there is no new information available for the investor to gain the extra return.