Reading 47: Market Efficiency (Market efficiency forms (Strong-form…
Reading 47: Market Efficiency
Informationally efficient market
Security prices reflect all available information fully, quickly and rationally.
The more efficient the market, the quicker its reaction to new information.
Only unexpected information would elicit trader's response.
Fully efficient market
Active investment strategies cannot earn the positive risk-adjusted return consistently.
Thus, investors should therefore use a passive strategy.
Market value vs. Intrinsic value
Price at which it can be bought or sold
The price that investors with full knowledge of asset characteristics would place on the asset.
Factors affecting market efficiency
Larger numbers of market participants and greater information availability (tend to make market more efficient)
Impediment to arbitrage, short-selling and high costs of trading&gathering information (tend to make market less efficient)
Market efficiency forms
Security price fully reflect all information about past price and volume
Technical analysis does not consistently result in abnormal profits
Security price fully reflect all publicity available information
Fundamental analysis does not consistently result in abnormal profit; however they are necessary if market prices are to be semi-strong-form efficient.
Security price fully reflect all private and public information
Active investment management does not consistently result in abnormal profit.
portfolio manager can add value by establishing and implementing portfolio risk&return objectives and assisting with portfolio diversification, asset allocation and tax minimization.