Question

the price of stocks at any point should reflect, fully, all available information. We live in the internet era where information is readily available. Investors react to information and the price of stocks react accordingly. Discuss the of the forms of stock market efficiency and the tests of the efficient market hypothesis. Include in your discussion a comparison and contrast between the Christian worldview and the secular worldview about the stewardship of money. please do not plagiarize

Answer 1

Stock market efficiency refers that how much stock price can reflect all available and relevant market information. In efficient market all information are clearly reflect in the price of the stock or else we can say that all stock are accurately priced which reflect all available information. Its impossible to make profit from conducting any strategies. here neither fundamental nor technical analysis would work expect few special conditions like if the investors purchase high risk shares etc.

There are different forms of stock market efficiency

1. Weak form of stock market efficiency
2. Semi strong of stock market efficiency
3. Strong of stock market efficiency

Weak form of stock market efficiency

This efficient market hypothesis state that price of the stock fully reflect all available market information that means all information incorporated in stock price so technical analysis will not work here for making trading decision which means analysis on past stock price movement. This weak form of stock market efficiency also indicate random walk theory that means future price of the stock reflect all current information and it would not depend on past movement of price. but here investors can do that fundamental analysis for determining actual value of stock including undervalued or overvalued of stock which include analysis of economic and industry information for determining inner value of stock.

Semi strong of stock market efficiency

Here this theory advocate that all publicly available information which include companies statements, new articles etc all information is used for calculation of stock price so technical or fundamental analysis would not work here for extra gain in trading. But here investors can use information which is not available and they this is the only way they can generate extra return that market return by using all of those information.

Strong market efficiency

Here this theory state that all information reflect in the stock price which includes all those information which is publicly available and which is not publicly available so there is no opportunity to gain in stock trading using any of these information. so investors can not make any excess return than normal return using any information  

All forms of stock market efficiency

Weak form - price of the stock reflect past movement of stock

Semi-strong form - price of the stock reflect all publicly available information

Strong form efficiency - price of the stock reflect all public information and information which is not available to public.

Tests of the efficient market hypothesis

Weak form - Here we plot a dot on the basis of return from that trading and we will find that there is no correlation between these return.

if we assume that these are the plots where we marked the return then we can say we can not predict the future price as there is no correlation between price movement.

Semi-strong form - here it depends within how many days stock price react with the information as if takes time then investors will get advantage for making extra return or else if any information goes public then and there stock would be priced accordingly.

Like this graph sales value automatically increased due to some announcement now until the that news announcement there is a possibility of getting extra return but when this announcement done then stock would be priced accordingly.

Strong form efficiency - here as i said earlier price of the stock reflect all public information and information which is not available to public. so nothing can effect the stock market price that means when there would be delivery of any information if its public then automatically price will get adjusted and if its private information like amalgamation or merger then also these private information would not change the price.

In this chart we can see that price is gradually increasing so there would be no point of using private information for earning extra amount of money from trading in comparison with normal market return.

stewardship of money. - This means to care taker of money that means if I am steward of any money that means I have the responsibility of taking care of that money as a owner but I will not become a owner.