Question

What is market efficiency? Do you think the market is efficient? Why or why not? What investment strategy would you utilize if you believe that the market is (not) efficient?

Answer 1

The strong form of market efficiency simply proclaims that, especially in the short term, it is difficult to reliably outperform the market because stock prices can not be anticipated. This may be controversial, but the most controversial aspect of maket efficiency is the claim that analysts and professional consultants add little or no value to portfolios, particularly mutual fund managers (with the notable exception of those managing funds that take on higher risks), and that professional portfolios do not consistently outperform randomly selected portfolios. Market performance is referred to as the degree to which all relevant information is provided by market prices. It is the calculation of the quality of the relevant data for all market participants. Therefore market prices are the degree to which market prices in the form of information show the valid data.

Market effectiveness refers to the degree to which current prices represent all available relevant information on the real value of the underlying property. A truly efficient market eliminates the possibility of beating the market, as the market price already includes any information available to any trader. As information quality and quantity increase, the market becomes more efficient

First, the efficient market hypothesis assumes the same perception of all available information by all investors. The various methods of stock analysis and valuation pose some problems with the validity of the EMH. When one investor is searching for undervalued market opportunities while another is assessing a stock based on its growth potential, these two investors will have already arrived at a separate assessment of the fair market value of the stock. Therefore, one criticism against the EMH points out that it is impossible to determine what a stock should be worth in an efficient market because investors judge stocks differently.