Question

i. Explain the three forms of efficient markets as stated in the Efficient market hypothesis (EMH). What type of investment strategies would work best if the markets are actually efficient?

.ii.       Explain with suitable examples from the business world, the role of Corporate Governance in efficient working of a business. You may take reference from agency theory in drawing up your analysis.

Answer 1

I. Three forms of efficient market hypothesis are strong, semi strong, and weak form of market efficiency.

strong form of market efficiency advocates that all the publicly available information as well as privately available information have already been incorporated into the price of the share.

Semi strong form of market efficiency advocates that all the publicly available information have already been discounted into the share price but privately available information are not discounted into the share price so there is always a scope for making excess return through access of insider information.

Weak form of market efficiency advocates that the current share price does not reflect the all information and hence it can be exploited through technical analysis and excess rate of return can be made.

passive investment strategy with work best if there is an efficient market and all informations are already discounted into the price because one can never beat the index rate of return in such scenario .

ii)corporate governance can help a lot in efficient working of the business as it is regular due diligence and following with complete set of rules and regulations along with ethical incorporation into the business strategies so that interest of stakeholders are protected.

it can also help in solving up with the agency problems between the management and the shareholders as they both are the stakeholders of the company and they both share principal and agent relationship so that management should always be working for betterment of the interest of the shareholder and maximization of their wealth.

it can be exampled through a better corporate governance, as it will always be commanding a premium over its peers in the respective segment