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Define the three forms of the efficient market hypothesis. Give an example of each.

  1. Define the three forms of the efficient market hypothesis. Give an example of each.

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Expert Solution

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Efficient market hypothesis:

The security prices already reflect all the available information.

The efficient market hypothesis says that past price movement, earnings report and volume traded doesn't affect stocks Current price and can't be used to predict the stocks future directions.

In simple words, past performance doesn't guarantee the future performance of the stock price moment. The stock price follows Brownian motion. That is stock price moment is random that's why it's also called as random walk theory.

They are 3 levels of Market efficiency:

1. Strong efficiency: Insider information, fundamental analysis and technical analysis are unless in such a market. Ex: When the Stock price is unaffected by Insider Information like a Scam or Product failure, then that market is 100% Strong efficiency.

2. Semi- Strong: fundamental analysis and technical analysis are unless in such a market. Ex: US stock markets.

3. Weak: technical analysis is unless in such a market. ex: Commodity market like Gold.


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