Efficient Market Hypothesis
Overview
The efficient market hypothesis is an expression of the idea that investors will purchase only the assets that they think
will perform relatively well, and will sell any asset that they believe will not perform well. This process will increase the
the price of assets with high expectations and decrease the price of the low expectation group until the prices reach
an equilibrium where all assets have the same market expectation. (relative to risk)
Forms of the Hypothesis
- The Weak Form:
The weak form asserts that there is no information in the price history of an asset that can aid in forecasting the future value.
- Semi Strong Form:
The semi - strong form asserts that no public information can help in forecasting the future value of an asset. However,
private information about the firm can give an advantage.
- Strong Form:
The strong form asserts that there is no information which can aid an analyst in forecasting returns.
Tests of the Efficient Market Hytpothesis
