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Efficient market hypothesis - Coggle Diagram
Efficient market hypothesis
Theoretical state of the financial markets which states that it is impossible to beat the market due to information efficiency which reflects prices at fair value and all known information both prices in and available to all market participants
The theory assumes that shares always trade at fair value, making it impossible for investors to find undervalued company shares
If shares are priced efficiently then their prices will reflect forecasts of expected benefits form cash flows capitalised at the appropriate discount rates fro present pruchase
Any new information will be rapidly absorbed into the price to keep it fair
Weak form
All information that can be gleaned from historic price movements has already been incorporated into the current price of the investment
It should not be possible to predict future price movements by past price movements
Technical analysis (the use of historical share values, often assimilated on graphs) cannot be used to forecast where excess returns can be achieved.
The market will have at least this level of efficiency if an investment pattern of returns cannot be predicted from historical patterns
Prices should have a random walk with variations around the expected return being unpredictable
Semi strong form
This form states that current share prices not only reflect the information available in the weak form but also that they quickly absorb all new publicly available information and that the current price has factored in both market and non-market public information
For instance if a company releases figures consititing new information, the price will quickly readjust to account for it
This form allows for direct and company insiders to have greater knowledge despite the fact that they willl not be able to trade on the information for instance merger and acquisition knowledge or other private information such as the knowledge of the figures and reports ahead of market release
Fundamental analysis cannot be utilised to achieve excess returns
Strong from
Assumes that all information, both publicly available and private is reflected in the current share price
This includes market, non-market and insider information which are all factored in and alludes to a near-perfect market where excess returns cannot be achieved on a consistent basis
No investor will ever be able to make better than average returns or outperform the market