EMH

Question 1

What is the Efficient Market Hypothesis (EMH)?

Answer 1

It’s the idea that asset prices fully reflect available information—so you can’t consistently beat the market.

Question 2

What is the Weak/Semi/Strong Form of EMH?

Answer 2

A: Prices reflect all past prices and volume; you can’t profit from technical analysis or chart patterns.

Prices reflect all public information; you can’t profit from news or financial reports because prices adjust instantly.

Prices reflect all public and private information—even insiders can’t earn excess profits.

Question 3

Semi-Strong Form – Deeper Understanding
Investors
Example

Answer 3

Public info is already priced in, so reacting to news doesn’t give you an advantage.
A company announces high profits → stock price jumps immediately → no time to buy low after hearing the news.
Insider info illegal can happen

Question 4

What is arbitrage in finance and how does it help make markets efficient?

Answer 4

Buying low and selling high to make risk-free profits when prices are wrong.

It corrects mispriced stocks—smart investors buy underpriced assets or sell overpriced ones, pushing prices back to fair value.

Question 5

Limits to arbitrage

Answer 5

Fundamental risk – price might not move as expected

Noise trader risk – irrational traders cause volatility

Financing constraints – limited money to keep betting

Question 6

Why do limits to arbitrage matter

Answer 6

They stop traders from fully correcting mispricings, so prices may stay wrong longer than expected.

Question 7

What is behavioural finance?

Answer 7

A field that studies how emotions and biases affect investor decisions and market prices.

Question 8

Name 2 common investor biases
How do biases affect markets

Answer 8

Overconfidence – investors think they’re smarter than they are
Herding – people follow the crowd instead of making rational decisions

They can cause mispricing, bubbles, and crashes—making markets less efficient.