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Wize University Introduction to Finance Textbook > Market Efficiency

The Efficient Market Hypothesis

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The Efficient Market Hypothesis

The EMH is a set of rules and beliefs about the market and the way information affects security prices.
  • States that markets are efficient
  • Security prices at a particular point in time reflect all available information.
  • Investor's cannot consistently earn abnormal returns, they cannot "beat the market."
  • The EMH is broken into three levels because not all investors have the same beliefs about the market's level of efficiency and the type of information reflect in market prices.
  • Weak form
  • Semi-strong form
  • Strong form


Extra Practice
Your friend recently found out from his uncle who works at an investment bank that a large tech company is planning to acquire a competitor. Your uncle knows this because the investment bank he works for was hired to help with the transaction, the news has not yet been announced. Over the next few days, both companies' stocks begin to rise despite the news still not being released. What can explain this?
ACME Corp just released its quarterly earnings and they exceeded the market's expectations by a significant margin. You decide to buy 100 shares of the company in order to capitalize on the good news. You believe the market is ____________.
Cyrus uses chart patterns to determine which stock to buy. He always buys a stock that has recently formed a double bottom. A double bottom is when the stock prices decreases to a similar point twice in a short period of time. Cyrus believes the market is _____________.
Cyrus uses chart patterns to determine which stock to buy. He always buys a stock that has recently formed a double bottom. A double bottom is when the stock prices decreases to a similar point twice in a short period of time. This is a violation of which form of the efficient market hypothesis?
You have a strategy of buying stocks with a relatively low price-earnings ratio. This strategy violates which form of the efficient market hypothesis?
A news report announces new government incentives on electric vehicle purchases. You decided to buy stock of an electric vehicle manufacturer after hearing the news. You believe the market is ____________.
Which of the following statements is false?