Question

Antonia Efficient went to a major investment conference in Boston and heard Andrew Lo, a prestigious MIT Finance professor. Andrew said that the market is efficient in quickly incorporating available relevant information into the stock price. Antonia was planning to heavily invest in the stock market to recover part of her business losses. But she is not sure now. She wants to hear your expert opinion but in layman terms (arroz y habichuela) about Andrew’s opinion.

Required: a. What arguments do you have?

i. In favor

ii. Against Andrew’s statement. (Be thorough)

Answer 1

1.A. in favour of Andrew's statement, I would advocate that stocks market are efficient as the publicly and privately available information have already been incorporated into the stock price. The index reflect the complete informations and stock price discount all of the previous events. It can be seen through the performance of active Mutual funds which have been usually underperforming the stock market index in past decade even if there was a bull market.

It can also be advocated that markets are efficient as technical analysis are just speculative trades and the actual trend of market can never be predicted as markets only reacts through new informations.

1.b. In against of Andrew's statement, I would advocate that stock markets are not completely efficient as there is a scope of making an extraordinary rate of return through insider trading as it is often seen through management buying their own shares and directors selling their own shares in anticipation of some bad news or good news, they already knows.

there is always scope for making higher return than index as it can be seen through performance of hedge and arbitrage funds in past decades.