The Efficient Markets Hypothesis ( Emh ) Essay

1071 Words Dec 29th, 2015 null Page
The Efficient Markets Hypothesis (EMH), also popularly known as the Random Walk Theory, is the proposition that current stock prices fully reflect available information about the value of the firm. The first time the term "efficient market" was in a 1965 paper by E.F. Fama who said that ‘in an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices.’

A market is said to be “efficient” if prices adjust quickly and, on average, without bias, to new information. At any point in time, prices of securities in efficient markets reflect all known information available to investors. Efficient market is one where the market price is an unbiased estimate of the true value of the investment. As a result, all investments in efficient markets are fairly priced, i.e. on average investors get exactly what they pay for. Market efficiency does not require that the market price be equal to true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random. Randomness implies that there is an equal chance that stocks are under or over valued at any point in time. If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or overvalued stocks using any investment strategy.…

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