Question

What do you believe stock market is regarding the three forms of the efficient markets hypothesis? Justify your position.

Answer 1

In an information ally efficient capital market, security prices reflect all available information fully, quickly, and rationally. The more efficient a market is, the quicker its reaction will be to new information. If the market is fully efficient, active investment strategies cannot earn positive risk adjusted returns consistently, and investors should therefore use a passive strategy. Large numbers of market participants and greater information availability tend to make markets more efficient.

If markets are weak-form efficient, technical analysis does not consistently result in abnormal profits. If markets are semi-strong form efficient, fundamental analysis does not consistently result in abnormal profits. However, fundamental analysis is necessary if market prices are to be semi-strong form efficient. If markets are strong-form efficient, active investment management does not consistently result in abnormal profits.

I believe the US markets are strong-form efficient as most active fund managers have failed to the benchmark over long period of time. Hence, investor in the US should use passive investment products like S&P500 ETF to invest.