Question

The Efficient Market Hypothesis implies that future stock price movements should be random and unpredictable. Why?

The Efficient Market Hypothesis implies that future stock price movements should be random and unpredictable. Why?

Homework Answers

Answer #1

As per the EMH, markets are efficient, and all securities reflect all information regarding them, and therefore all securities are fairly priced. In an efficient market, no investor can earn an excess return by any means because all securities are correctly priced.

If this were true, then no form of technical analysis should enable any investor to earn an excess return. If future stock price movements are not random and unpredictable, it means that technical analysis could be employed to earn an excess return. This goes against the assumption of EMH.

Therefore, the EMH implies that future stock price movements should be random and unpredictable.

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