Question

Briefly explain the three forms of market efficiency. For each type, give one example and explain whether market is efficient in your example.

Answer 1

Three form of market efficiency are-

A. strong form of market efficiency which will advocate that all the publicly available information and the privately available information has already been discounted into the stock price and there is no scope for making any additional rate of return so strong form of market efficiency will always be advocating for passive investment because there can never be excessive rate of return in order to beat the market rate of return.

B. Semi strong form of market efficiency will be advocating that all the publicly available information have already been discounted into the stock price but privately available information have not been discounted into the stock price and there is a scope for making additional rate of return by having an access to the the insider information.

C. Weak form of market efficiency advocates that current prices are reflective of historical trends and past informations so these current prices can not be able to make prediction about the future prices and there will not be any application of technical analysis in order to make excess rate of return in the market

Example of strong market efficiency will be that when there will be no difference between the intrinsic value and the market price of a company and it will reflect strong efficiency

Example of semi strong form of market efficiency will be when those persons who are close to directors are making higher rate of return than normal investors and this will be reflecting semi Efficient market. This will not be reflecting complete efficiency.

Example of weak form of efficiency is that technical analyst will not be able to make higher rate of return and they will underperform the market and the market will not be efficient as they are not reflecting all available information.