The Efficient Markets Hypothesis investment model holds that prices of shares portray the market information. The theory postulates that stocks are always purchased and sold at fair value, hindering the investors from buying the undervalued stock or selling them at an inflated price. Since fundamental nor technical analysis can produce risk-adjusted excess returns, how does businesses learn about new information and incorporating it in prices? Technical analysis reports the past prices of stocks, aiming at predicting future cost. Fundamental analysis deals with evaluating financial data such as the value of assets and company earnings, information which assists in selecting the stocks considered undervalued, which would lead to higher returns. Eugene Fama (2013) addresses the importance of risk management and measurements in the market hypothesis (Nobel Prize, 2013). It would lead to new information, which would, in turn, be incorporated insecurity pricing without delay. Risk measurement and management are the ways which can help determine whether the markets are efficient.
Malkiel (2003, p.62) explains the case of information analysis in the stock market using the phrase “ransom walk.” It describes how stock information is useful on a single day. The flow of data reflects the stock prices in a single day, and on the next day, with the price change, new information will be availed. Each cost of stocks is independent of that from the previous day. The “random walk” thus reflects market inefficiency. However, since the news are unpredictable, it results in erratic and random changes in cost of shares. Some experts are able to make predictions of the possible rise or fall in stock prices with the available information. The information guides the investors on stocks purchases and selling on a diversified portfolio. The data forecast is thus essential in predicting possible increase or reduction of price, thus guiding the pricing of stocks, despite market inefficiencies.
Delegate your assignment to our experts and they will do the rest.
Bibliography
Malkiel, B.G., 2003. The efficient market hypothesis and its critics. Journal of economic perspectives , 17 (1), pp.59-82.
Nobel Prize., 2013, December 12. Professor Eugene Fama speaks about his work to young students. Retrieved November 10, 2019, from https://www.youtube.com/watch?v=_rOLWs1T33Y.
