Page 201 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management Neha Khosla, Lovely Professional University

Notes Unit 7: Efficient Market Theory

CONTENTS
Objectives
Introduction

7.1 Efficient Market Hypotheses
7.2 Efficient Frontier: (i) Risk-free and (ii) Risky Lending and Borrowing
7.3 Benefits of an Efficient Market (Investors Utility)

7.4 Evidence for Market Efficiency
7.5 The Efficient Frontier and Portfolio Diversification
7.6 Forms of the Efficient Market Hypothesis
7.7 Testing Market Efficiency
7.8 Are the Markets Efficient?

7.9 Summary
7.10 Keywords
7.11 Self Assessment

7.12 Review Questions
7.13 Further Readings

Objectives

After studying this unit, you will be able to:
Discuss forms of the Efficient Market Theory
Explain the concept of weak form and random walk, semi-strong form

Describe strong form efficient market hypothesis
Discuss implications of efficient market hypothesis
Understand efficient market theory and appraisal

Introduction

An efficient capital market is one in which security prices adjust rapidly to the arrival of new
information and, therefore, the current prices of securities reflect all information about the
security. Some of the most interesting and important academic researches during the past 20
years have analyzed whether our capital markets are efficient or not. This extensive research is
important because its results have significant real-world implications for investors and portfolio
managers. In addition, the question of whether capital markets are efficient is one of the most
controversial areas in investment research. Recently, a new dimension has been added to the
controversy because of the rapidly expanding research in behavioural finance that likewise has
major implications regarding the concept of efficient capital markets. You need to understand
the meaning of the terms efficient capital markets and efficient market hypothesis (EMH) because

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