Business, Legal & Accounting Glossary
Developed by University of Chicago professor Eugen Fama in the 1960s, the efficient market theory states that, at any given time, all available information is fully reflected in securities’ prices.
The efficient market theory implies that no investor can consistently outperform the market since every stock is appropriately priced based on available information. The efficient market theory comes in three versions. In the strong form, the efficient market theory asserts that all information (including insider information) is incorporated in share prices. The semistrong version of the efficient market theory says that all publicly available information is reflected in share prices. The weak form of the efficient market theory asserts that past information is reflected in current share prices. Investors who accept the efficient market theory believe the portfolio manager’s role is to tailor portfolios to specific investor needs, not outperforming the market. Subsequent studies have uncovered market anomalies inconsistent with the efficient market theory and resulted in the rejection of efficient market theory by most investors.
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This glossary post was last updated: 9th February, 2020 | 0 Views.