Question

*Plain words

1. What is an efficient market?
2. What does an efficient market look like?
3. How have interest rates impacted the securities market?

Answer 1

Solution:

1.

Efficient Market: Efficient market hypothesis says that if the market is efficient then it is impossible to beat the market. The investors have all the information regarding the company, economy etc. When the market is fully efficient then different types of analysis like technical and fundamentals are not very relevant.

2.

Efficient market looks like the market where

1. Flow of information is such that every investor has all the information

2. No investor can beat the market return

3. Stocks are always traded at fair value

3. Impact of interest rate on security market : Higher interest rate are not desirable as it increases the borrowing cost for the companies hence making them less profitable. Lower interest rate means lower cost of capital for the company. If we see the bond market then the prices of bonds will fall as yield will increase. Overall growth of the market will slow down due to higher interest rate