Question

Several mutual fund managers practiced stock-picking based on P/E ratio or book-to-market ratio. All of them generated above average return for investors. Does it mean the market is efficient or inefficient and in what form? Explain why.

Answer 1

Stock value are based on the market prices because market prices are determined after the fair discovery through twin factors of demand and supply and they would be based upon both demand and supply & It would be fundamental and technical driven so it is believed that the markets are efficient in nature but actually, it is not in complete.

Mutual fund managers who have been selecting market value as their fundamental for stock selection like price to earning growth for book to market ratio are likely outperforming the market but these cannot be said that the market are completely efficient because there would always be an element of insider trading and manipulation of the books of accounts by the the related parties, so market is not completely efficient as if market would have been efficient, then the fund manager would not have been able to make a higher rate of return.

Efficiency of the markets is directly aimed at no investor can make an additional rate of return than outperforming the market so, the probability of generation of above average return is completely eliminated in the case of the market efficiency as all the prices of already been discounted into the current price so it can we said that the market is not completely efficient and im practicality, it will be efficient to be said semi strong or weak Efficient.