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In: Accounting

efficient market hypotheisis?

efficient market hypotheisis?

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Expert Solution

The efficient market hypothesis, alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information, and consistent alpha generation is impossible. According to the EMH, stock always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks at inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock seletcion or market timing and the only way an investor can obtain higher returns is by purchasing riskier investments.

Note :

1. EMH states that share prices reflect all information

2. EMH hypothesizes that stock trade at their fair market value on exchanges

3. Proponents of  EMH posit that investors benefit from investing in a low cost, passive portfolio

4. Opponents of  EMH believe that it is possible to beat the market and stocks can deviate from their fair market value


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