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Given that a stock price is the PV of the firm’s cash flow, discuss the positions...

Given that a stock price is the PV of the firm’s cash flow, discuss the positions taken by a true believer, firm believer, mild believer and non-believer of the EMT ---- in terms of what/how they believe an investor can exploit the market.

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Answer #1

As per the true believer of EMH, the prices represent the PV of cash flows. Hence prices reflect all available information and the market cannot be exploited.

Firm believer: As per the firm believer, the prices do not fully reflect PV of cash flows but this cannot be exploited.

As per the mild believer, prices deviate from the PV and exploiting the market is possible with a mild edge over others.

As per the non believer, prices deviate from the PV of cash flows very strongly and it is easy to exploit the market.

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