Question

Jane went to a major investment conference in New York and heard John, a prestigious Finance professor, saying that the market is efficient in quickly incorporating available relevant information into the stock price. Jane 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 about John’s opinion. What arguments do you have in favor and against John’s statement?

Answer 1

John is not completely true in saying that market is efficient in quickly incorporating available relevant information into the stock price because market have only discounted the publicly available information but it has never discounted the privately available information because one can be assured by looking at post earning announcement drift which is a strong contradiction of an efficient form of market.

When the earnings of a company are announced, the management of the company already know about the earning report, so according to the efficient market hypothesis, these information must have been discounted into the stock price, but once the results are announced it can be seen that there is huge price movement and reaction which is a straight contradiction of an efficient market theory.

market can be efficient by Looking through performance of active fund managers in the past decade as it has outperformed the active fund managers by large extent so it can be advocated that one can never beat the stock market index rate of return to a large extent.

so john is partially true in saying that market is efficient because of above stated regions.