Question

What are the three forms of efficient market hypothesis? What do the three forms suggest?

Answer 1

Fama and French developed the theory of efficient market hypothesis. They state that it is impossible for an investor to beat the market since prices in the market incorporate and reflect all available information which can impact a stock.

Efficient Market Hypothesis:

1.Weak form efficiency: Weak form efficiency assumes that all available information is reflected in the prices. So, it is not possible to use technical analysis to achieve high returns.

2.Semi-strong efficiency: Semi-strong efficiency assumes that stock prices have been factored all public information. So, it not possible to use fundamental analysis to beat the market.

3.Strong form efficiency: Strong efficiency assumes that all information, public and private are reflected in stock prices. So, it is not possible to use insider trading to beat the market.