Question

1. Describe the three forms of market efficiency.

2. Explain why the presence of market anomalies may raise doubt about market efficiency.

Answer 1

1. There are three types of market efficiency overall described by the Efficient market hypothesis-

A. Strong form of market efficiency advocates that public available information and private available information have already been discounted into the price, and there is no room for making an additional rate of return by investing into the market and it advocates the passive form of investment. It also advocates that there is no arbitrage opportunity in the market.

B.Semi-strong form of market advocates that all publicly available information have already been discounted into the price but the privately available information has not been discounted in the price,so there is always a scope for making an additional rate of return through insider trading.

this form of market will also advocate passive investment because this also advocates, that there is no possibility of making an additional rate of return by actively investing into the market.

C.weak form of market efficiency advocates that there is no room for the technical or the fundamental analysis in order to beat the market rate of return because the market price are not truly reflective of all the past information and there is no trend in the market and it will only be reacting to the newly available information which have not been discounted into the price.

So, these are the three forms of market efficiency of an investor should be keeping in mind while investing into the market.