Question

LIst and diseuss How would you define efficient security markets? in your definition and discussion, be sure to 2. define and discuss the three forms of market efficiency covered in Chapter 14.

Answer 1

The degree to which, all market traded securities incorporate all relative information into its prices is known as "Market Efficiency". Economist, Eugene Fama developed this theory, which is widely known as Efficient Market Hypothesis. The EMH theory states that in an efficient market, it is not possible for an investor to outperform the market as in its efficient form, market would already incorporate all the available information relevant to its price.

The market efficiency can broadly be categorized into three parts; Weak form, Semi-strong form & Strong form.

In its weak form, market won't reflect accurate price of a stock as it wouldn't incorporate relevant information and historical data would play an important role.

In semi-strong form, all publically available information is incorporated in the prices, however some privately available information can be used to outperform the market.

In its strong form, it's not possible to beat the market as all kind of information, whether private or public, is already reflected in the prices.