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In: Accounting
What are the three forms (degree) of informational efficiency?
What are the three forms (degree) of informational efficiency?
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Expert Solution
Ans: Informational efficiency is actually nothing but the degree to which the market prices responds and thus such prices quickly and correctly reflect to the information and because of this it represents the true value of the underlying assets.
There are basically three forms of informational efficiency: 1) Weak form of informational efficiency that basically tells us that current available prices are actually reflecting all the past trading data and thus it does not enable the trader to forecast the future prices based on past trading data.
2) Second form of informational efficiency is called semi strong form of efficiency , that basically tells us that current available prices of stocks actually reflects all the information which available publicly.
3) The third form of informational efficiency is called Strong form of efficiency this basically tells us that all the stock prices reflect basically all the information whether publicly or private available hence making it impossible for the for any one/ traders with even insider information to influence the prices of the stocks.
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