Question

Please write 3-4 paragraphs to discuss whether you agree or disagree with the following statement:

Markets are efficient and most mutual fund managers and analysts cannot help investors improve returns to their portfolios.

Your discussion should also focus on the different roles played by analysts and portfolio managers.

Answer 1

Ans- Efficient Market Hypothesis was incepted in the year 1960 by famous economist Eugene Fama. It is a type of investment theory. The Efficient market hypothesis states that the markets are efficient it is not possible or impossible to beat the market because the price of shares reflects all the relevant information. In other words, according to this theory, it is pointless to look for undervalued stocks and to forecast or make predictions using the technical analysis or fundamental analysis.

As per this hypothesis when anyone buys or sells the stock he is taking part in a game of chance rather than his skill. There the three version or of Efficient market hypothesis

1 Weak form - It suggests that the current price of shares reflects all the prices of shares in the past and there is not any type of technical analysis that can be used effectively to help investors in making trading decisions.

2 Semi-strong form- It believes that all the information which is available in public will help the investor to know the current price of the stock and no technical or fundamental analysis will help the investor in gaining higher returns

3 Strong Form- It strongly believes that all the information which are known by the public or not known by public totally reflects the today's stock price and there is not any type of information can give anyone leverage over the market.

The argument against this hypothesis- This hypothesis is highly controversial and debatable till today. Technical analysts disregard this theory. They say that stock performances can be forecasted on past price, earnings track records, and another technical indicator which will help the investor in gaining higher returns.

In today's scenario, there is enough information available which suggests that Efficient market hypothesis cannot be always right because many investors have proved and beaten the market time and again. E.g. one of the most intelligent investor Warren Buffet who has beaten the market and gained higher returns. Investors in the past have bought undervalued stocks kept it for a long time and have gained higher returns, which suggests that this theory cannot be always right.

Portfolio managers take the help of technical and fundamental analysis which helps the investor in gaining higher returns. There is no information which can suggest that the market will always be correct or incorrect. Technical and fundamental analysis will definitely help but cannot be super predictive. The market runs on the behaviour of the investor so I disagree with this Efficient Market Hypothesis