Question

You are a subscriber of Smart Investing magazine that provides the latest news and trends in the stock market. Based on the most updated information, it suggested to sell the technology stocks. Explain your opinion with the perspective of Efficient Market Hypothesis. (10%)

Answer 1

Efficient Market Hypothesis (EMH) states that all relevant information is factored into the prices instantaneously. As a result, shares are traded at their fair market value. However, all information cannot be treated alike. The ‘relevant information’ and its impact on the efficiency of the market can be classified into three as follows:

1. Weak form efficiency: All previous information and past data of price changes are reflected in the current prices.
2. Semi strong form of efficiency: All publicly available information is reflected in the prices
3. Strong form of efficiency: All information, both public and private are immediately disseminated and get factored into the prices of shares.

In an efficient market, any new information is immediately reflected in the prices. No one can take extra advantage by making use of any set information.

In the given situation, the recommendation by the Magazine is based on the most updated information. Hence, going by the Efficient Market Hypothesis, the investor cannot take extra benefit as the prices have been adjusted to them.