Efficient Market Hypothesis - DOC by ilo32820

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									            Efficient Market Hypothesis
Rationale
    1. There is a large number of profit-maximizing
       investors working independently in the analysis
       and valuation of securities.
    2. New information about securities reaches the market
       in a random fashion, is readily available, and is
       costless.
    3. Transaction costs are small.
    4. Investors adjust prices of securities rapidly in
       response to this new, randomly arriving information.
    5. The current price of a security is a fair price, fully
        reflecting the risk associated with the security.

The Random Walk Theory
    1. Future events are random and unpredictable.
    2. The best estimate of next period's value is simply this
       period's value.

Implications
    Security prices are determined in a logical, rational
    fashion, and in the long run should be expected to rise
    steadily. But price changes are random.
    It is not possible to derive trading systems or investment
    strategies based on current information that will produce
    returns greater than that expected on the basis of the risk
    of the security.
    It is very difficult to consistently “beat the market” on a
    risk-adjusted basis.

								
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