NAME : HAMZA AFZAL DURRANI

CLASS : F2

ROLL NO : 212

ASSIGEMENT : investment Analysis And

Portfolio Management
What Is Market Efficiency?

The degree to which market prices represent all accessible, relevant information
is referred to as market efficiency. If markets are efficient, all information is
already included into prices, and there is no way to "beat" the market because no
cheap or overpriced stocks exist.

The word comes from a paper produced by economist Eugene Fama in 1970,
but even Fama admits that the term is a little deceptive because no one knows
how to exactly describe or precisely measure what is known as market efficiency.
Despite these drawbacks, the phrase is nevertheless used to refer to Fama's
most famous work, the efficient market hypothesis (EMH)

Based on the current EMH, an investor cannot outperform the market, and
market anomalies should not exist because they will be arbitraged away
instantly. For his achievements, Fama was later awarded the Nobel Prize.
Investors who believe this notion are proponents of passive portfolio
management and buy index funds that track overall market performance.

KEY TAKEAWAYS

 Market efficiency is the degree to which current prices accurately represent

all available, relevant information about the underlying assets' actual value.
 In a truly efficient market, any information known to any trader is already
factored into the market price, removing the prospect of beating the
market.
 As the quality and quantity of data improves, the market becomes more
efficient. Reducing opportunities for arbitrage and above market returns.

Market Efficiency Explained

Market efficiency may be divided into three categories. Past price changes are
not useful for projecting future prices, which is a flaw in market efficiency. Any
relevant information that may be learned from previous pricing is already
included into current prices if all accessible, relevant information is incorporated
into current prices.

Such investment techniques as momentum or other technical-analysis based

rules used for trading or investing choices should not be anticipated to
consistently earn above-normal market returns based on this variant of the
premise. Excess returns utilizing basic analysis are still conceivable in this
variant of the hypothesis. For decades, this viewpoint has been widely taught in
academic finance courses, albeit it is no longer accepted as dogmatically.

The semi-strong form of market efficiency assumes that stocks adjust quickly to

absorb new public information so that an investor cannot benefit over and above
the market by trading on that new information. This implies that neither technical
analysis nor fundamental analysis would be reliable strategies to achieve
superior returns, because any information gained through fundamental analysis
will already be available and thus already incorporated into current prices. Only
private information unavailable to the market at large will be useful to gain an
advantage in trading, and only to those who possess the information before the
rest of the market does. 

Market prices represent all public and private information, according to the strong
form of market efficiency, which builds on and incorporates the weak and semi-
strong forms. Given the notion that stock prices reflect all information (public as
well as private), no investor, including a corporate insider, would be able to profit
beyond the ordinary investor even if he were privy to fresh insider knowledge.

Differing Beliefs of an Efficient Market

The strong, semi-strong, and weak variants of the EMH represent a wide variety
of views among investors and academics on the market's real efficiency. Strong
form efficiency believers, like Fama, are typically made up of passive index
investors. Active trading, according to proponents of the weak form of the EMH,
might yield anomalous gains through arbitrage, while semi-strong believers fall
somewhere in the middle.

Value investors, for example, are on the opposite end of the spectrum from Fama
and his supporters, believing that companies may become undervalued, or
priced below what they are worth. Successful value investors earn money by
buying inexpensive companies and selling them when their price increases to
reach or above their inherent value.
An Example of an Efficient Market

While there are investors who believe in both sides of the EMH, there is
empirical evidence that greater financial information distribution influences stock
prices and makes a market more efficient.

Weak Form Market Efficiency

The weak-form of market efficiency asserts that previous market dates are
completely represented in current market prices, implying that no rule established
from historical trend analysis can be utilized to generate excess returns.

The weakest version of the efficient market hypothesis is the weak-form of

market efficiency (EMH). The two other types of market efficiency are the semi-
strong form and the strong form.

Weak-form of market efficiency implies that technical analysis cannot be used to

predict future price movements. Technical analysis is the use of past price
movements to predict future price fluctuations. However, in the weak form of
market efficiency, fundamental analysis and non-public information can be used
to earn excess return.

Example
Prashant just started working at the Punjab Stock Exchange as a broker. He's
only recently become interested in investing and has no prior expertise. He saw
that Mohali Sports' pricing climbs on Mondays and falls on Fridays. He bought
100 shares of MSE's stock at 11 INR each share on a Friday, intending to sell
them on Monday and profit. When the market opened on Monday, Mohali Sports
declined to INR 10.5 per share.

The market seems to be weak-form efficient, because it is not letting Prashant

earn excess return by just picking stocks based on some past price pattern.

What is Semi-Strong Form Efficiency?

Definition:
The semi-strong form efficiency is a type of efficient market hypothesis (EMH),
which holds that security prices adjust quickly to newly available information,
thus eliminating the use of fundamental or technical analysis to achieving a
higher return.

What Does Semi Strong Form Efficiency Mean?

What is the definition of semi-strong form efficiency? 
The SSFE does not use historical prices, trading volume, rates of
return, earnings, dividend payments, profitability ratios, stock splits or any
other element of fundamental analysis. The hypothesis assumes that
investors, who trade their securities based on newly available information,
should expect an average risk rate of return. To outperform the market,
investors should accept a higher level of risk.
Let’s look at an example.

Example
Agatha buys 500 shares of a construction company that currently trade at $38
per share. A few days later, she reads in the financial news that the company
is expected to release outstanding results in the third quarter due to a
successful deal with a foreign company.

Once the construction company releases its third quarter results, the stock price
rises as expected. As a matter of fact, for a week, the stock price rises to $45 but
then drops to $36. Agatha wonders why the price does not rise further.

Obviously, the market is semi-strong form efficient and adjusts quickly to the
newly available information – in this case, the company’s strong results. To
realize a profit, Agatha should sell some of her shares at $45 per share as soon
as the market adjusted to the new information. Instead, Agatha held all her
shares, thus losing money.

If Agatha had sold 200 shares at $45 per share, she would realize a gross gain of
$9,000. Now that Agatha held all her 500 shares, she loses 500 x $45 – 500 x
$36 = $22,500 – $18,000 = $4,500, i.e. the difference between the price she
bought the shares and the price they trade.
Summary Definition
Define Semi-Strong Form Efficiency:

Semi-strong form efficiency means an economic condition where the market

adjusts prices of investments almost immediately as information is available.

Strong Form Market Efficiency

Strong form of market efficiency is when prices already reflect both publically
available information and inside information. In strong form of market efficiency, it
is not possible to earn access return by any means.

Strong form of market efficiency is the strongest form of efficient market

hypothesis, stronger than the semi-strong form of market efficiency and weak
form of market efficiency.

When a market is strong form efficient, neither technical analysis nor

fundamental analysis nor inside information can help predict future price
movements.

Markets rarely exhibit the characteristics of strong form of market efficiency.

Example
Shin taro Ishihara works at Osaka Automobiles as their chief engineer. He was
working on a new advanced model of automobiles and the project was a big
success. He was sure that this project will result in an increase in price so he
purchased 10,000 shares of Osaka Automobiles for $25 per share. He was
surprised to see that even after the news of the project being a success spread,
the share price did not increase.

The market seems to be strong form efficient, because it had already adjusted
Osaka Automobiles' stock price for the expected net present value of the new
project. It already reflected the inside information.

THE END