Question

Antonia Efficient went to a major investment conference in Boston and heard Andrew Lo, a prestigious    

MIT Finance professor. Andrew said that the market is efficient in quickly incorporating available relevant information into the stock price.  

Antonia was planning to heavily invest in the stock market to recover part of her business losses. But she is not sure now. She wants to hear your expert opinion but in layman terms (arroz y habichuela) about Andrew’s opinion.

Required:

a. What arguments do you have?

i. In favor

ii. Against

Andrew’s statement. (Be thorough)

Answer 1

1.a. in support of Andrew's statement, I would advocate that markets are efficient as all the the past related informations and privately available informations are already incorporated into the stock price and there is always a need to do passive kind of investing by following the index rate of return. An Investor can never outperform the index because all the relevant information have already been discounted into the stock price and it could be reflected through the past performance of several actively managed Mutual funds who have underperformed the stock market index in recent decade.

2.in against of Andrew's statement, I would advocate that stock market are not completely efficient as there is high scope of technical Analysis and a lot of technical analyst makes a lot of money and many of the hedge fund and arbitrageurs are also outperforming in the market. many of the active investors outperform the markets as well and there is always a scope for insider trading as privately available information are not discounted in the stock price so the market is not completely efficient.