Question

Elaborate on the three forms of market efficiency.

Answer 1

Three form of market efficiency are as follows-

A. Strong form of market efficiency- strong form of market efficiency advocates that all the privately available information and the publicly available information have already been discounted into the stock price and there is no scope for making any additional rate of return because the intrinsic value of company is equal to the fair value of company so it only makes scope for the passive investment.

B. semi efficient form of market will advocate that all the privately available information have not been discounted into the stock price but publicly available information have been discounted into the stock price so there is a scope of making additional rate of return by having access to the insider information and all those people who have private information about the company are having an advantage in making excess rate of return.

C. Weak form of market efficiency will advocate that prices are reflective of the past Trends and historical prices so these prices cannot be used for making predictive future return. only new information can help in making additional rate of return and technical analysis will be a complete failure in weak form of market efficiency because there will be no trend available.