Efficient market hypothesis

Question

What is the efficient market hypothesis?

Answer

The efficient market hypothesis theory claims that stock prices accurately reflect all available information in the market, therefore it is not possible for investors to beat the stock market. There are three variations of the efficient market hypothesis, including: Weak form efficiency: This form claims that a stock’s price today reflects all past information regarding the stock. Therefore, it is not possible for an investor to beat the market using past information or using technical analysis. Semi-strong form efficiency: This form assumes that a stock’s price today reflects all public information available to the public/investors. Therefore, it is not possible for an investor to beat the market using either technical or fundamental analysis. Strong form efficiency: Lastly, this form claims that the market is efficient because the stock price of a firm today reflects all available information (including private or public). Therefore, an investor cannot beat the market, even if they have insider knowledge.

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