Question

Briefly explain the efficient market hypothesis and its three forms.

Answer 1

Efficient market hypothesis states that share price reflects all available information and therefore consistently abnormal return is not possible.Proponents of this theory says that it is not possible to beat the market that means investor cannot make return by buying underpriced stock and sell stock at inflated prices

The three forms of this theory are as follows:-

(1)weak form:-It says that stock prices reflect all data of past prices and therefore technical analysis will not be helpful.Only fundamental analysis can help investor to get make returns.

(2)Semi strong form:-It believes that all publicly available information is reflected in stock price .Therefore technical and fundamental analysis both will not be helpful.Only insider information can help in getting return

(3)Strong form:-It believes that all information publicly available as well as insider information is reflected in stock price.Therefore any type of analysis cannot help in earning abnormal return