Session6 - handout 10

Question 1

What are the 3 forms of market efficency?

Answer 1

1) Weak form: prices reflect all information contained in the history of past trading
2) Semi-strongform: prices reflect all publicly available information
3) Strong form: prices reflect all relevant information, including inside information.

Question 2

What are some favourable evidence for EMH?

Answer 2

1.Investment analysts and mutual funds don’t beat
the market - Inside information is the only proven method to beat the market

2. Stock prices reflect publicly available info: anticipated announcements don’t affect stock price
3. Technical analysis does not outperform market - due to the Random Walk

Question 3

What are some unfavourable evidence for EMH?

Answer 3

1. Small-firm effect: small firms have abnormally high returns even when there is a greater risk present.
2. January effect: high returns in January - inconsistent with the random walk
3. Market overreaction - overreaction to news
4. Excessive volatility - Higher fluctuations in the stock price rather than the fundamental value
5. Mean reversion - Low returns today leading to higher returns in the future
6. New information is not always immediately incorporated into stock prices - its slowly changed afterwards instead