Explain efficient market hypothesis
similarities and differences between CAPM and APT
1) The efficient market hypothesis states that information is universally available and hence market participants are aware of the same. This will lead to the fact that stock prices will reflect all the news and events in itself in an effective manner. According to this theory the prices of stock market moves on current news instead of yesterday's trends. Basically, trends do not matter under efficient market hypothesis, because prices are driven by current information, news and events which are already 'priced in' within current stocks and their prices. Under the strong form of theory, it can be assumed that there is perfect transparency of information and future movement of stock prices are independent of the past movements, but are based on current news and information.
2) The CAPM stands for Capital Asset Pricing Model and APT stands for Arbitrage Pricing Theory. Both the theory are being used for the purpose of determining theoretical rate of return on a portfolio or a particular asset. The similarities and differences between the two theories can be laid down as follows:
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