Efficient Market Hyphothesis

Question 1

Can we predict Stock Prices ?

Answer 1

No Prices are as likely to go up as down. ( Before 1953 It was believed that they would co-move with booms and busts, but as studied before, Market risk is not the only risk a stock faces, and Betas indicate if stocks move along with the market or opposite to it)

Question 2

Why stock prices follow randomized changes ? ( random walk )

Answer 2

Because all information availble is already incorporated into stock prices. New information will be the one that generates price changes. New info is unpredictable.

Question 3

Why is all existing indo alrerady incorporated into prices ??????????

Question 4

What is the definition of a Weak Form EHM ?

Answer 4

WEAK = Weak Mindset = Only think of past

all past market trading information is reflected on prices

Question 5

Semistrong

Answer 5

All PUBLICLY availble information regarding prospects of a firm is reflected in prices

Question 6

Strong

Answer 6

All information Relevant to the firm is reflected

Question 7

Is Tecnical Analysis efficient in a Weak Form Market ? Why

Answer 7

No. All available past information is already incorporated in the prices

Question 8

Is fundamental Analysis efficient in a Semi Strong EMH ?

Answer 8

Implies MOST ( not all ) fundamental analyses have no value. All public information about company prospects if incorporated in the prices. Therefore will be hard to find over/under valued firms through fundamentals.

Question 9

How does the EMH theroy translate to real life ?

Answer 9

Not all info is incorporated in prices. Because information gathering is costly.

• In emerging markets info is less analysed ( small market, more corruption and hard acess to info)
• Small Stocks are less analysed than Big stocks. ( less interest ? ) (less demand ?)