Efficient Markets Hypothesis Essay Example | Topics and Well Written Essays - 1000 words

Efficient Markets Hypothesis - Essay ExampleThe essence of the efficient profanekets hypothesis evolved from an earlier bang-up as assemblepricing model or CAPM based on investors unobservable beliefs about future returns. The CAPM predicts a linear relationship between the postulateed rate of return on an asset and that assets systematic risk, often termed beta. The CAPM model in turn led to the arbitrage pricing theory which is more general than the CAPM by including a set of unspecified factors which influence capital valuations. The CAPM in turn has been expanded into a broader format including such factors as the size of the company and the ratio of book cling to to market value this version has gained wider support over the past ten years (Negakis, page 3).The efficient market hypothesis, as defined by Fama expiry back to 1970, defines an Efficient Market as the one in which credentials prices fully reflect all available information. Fama, in 1970, identified terzetto f orms of Market Efficiency. In the weak form, no investor can expect to gain from analyzing historical data as that data would already be reflected in capital asset prices. In the semi-strong form, no investor can expect to gain from analyzing publicly available information for the same reason. In the strong form, no investor can expect to gain from analyzing information from any source (Negakis, page 3).The efficient market hypothesis requires the existence of a highly-competitive market. with a large number of very-well-informed traders and in which transactions are costless.It would then not matter how some shares or other capital assets a trader sells - the pricewould remain unaffected by his actions as the market would already have taken them intoaccount. The market would already reflect all available information, which would be included automatically in the price of the shares or other assets under consideration. Theadvent of portfolio theory has strengthened the efficient ma rket hypothesis by focusing 3on the valuation of an entire portfolio of many securities rather than on each ones value.In a fully-diversified portfolio, the trader or investor need not be as concerned over eachsecurity or capital asset but rather on the risk and return of the total range of those assets.According to Fama, the strong version of the efficient mar