Question

In what way does your beleif on market efficiency influence your security valuation?

In what way does your beleif on market efficiency influence your security valuation?

Homework Answers

Answer #1

Market efficiency refers to the extent to which market prices of a stock reflect all available information. Thera are 3 forms of market efficiency:-

1) Weak form market efficiency

2) Semi - Strong form market efficiency

3) Strong form market efficiency

An investor's belief regarding market efficiency will influence the security valuation. In a weak form market efficiency, the investor believes that all past data is included in the stock price so there is no scope of earning returns using technical analysis. However, investors can use market related and market non-public information to earn returns in weak form market efficiency. In a similar way, if the investor believes that the market is semi-strong efficient she can only earn return using non-public information because the security prices already reflect past price data and market data in it

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