COM 104 Lecture Notes - Lecture 14: Eugene Fama, Mutual Fund, Modern Portfolio Theory
27 Jun 2018
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Efficient Market Hypothesis
The efficient market hypothesis (EMH) is an investment theory that states it is
impossible to "beat the market" because stock market efficiency causes existing
share prices to always incorporate and reflect all relevant information. According to
the EMH, stocks always trade at their fair value on stock exchanges, making it
impossible for investors to either purchase undervalued stocks or sell stocks for
inflated prices. As such, it should be impossible to outperform the overall market
through expert stock selection or market timing, and the only way an investor can
possibly obtain higher returns is by purchasing riskier investments.
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Document Summary
The efficient market hypothesis (emh) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the emh, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can possibly obtain higher returns is by purchasing riskier investments. The efficient-market hypothesis (emh) is a theory in financial economics that states that asset prices fully reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.
