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Hello Sir John. I am having trouble understanding Capital market efficiency theory. I have watched your lecture BUT still unable to grasp the idea of this.
1) Weak form efficiency is where the share price already incorporated past share price movements. Therefore, we can’t make abnormal gains by studying past trends of share movement BUT we can make abnormal gains by studying Public Information [Correct]
2) Semi-strong form efficiency is where the share price already reflected past trends & public information available about the company. Therefore, we can’t abnormal gains from Past Trends & Public Information BUT we can make abnormal gains by privately held Information [Correct]
3) Strong form efficiency is where the share price already incorporated all information including inside information about the company. Therefore, we can’t make abnormal gains from privately held information. [Correct]
I have come across one of the MCQ in specimen paper where it is given an option ‘Not Efficient at all’. Can you explain what does this means?
Also, Can you please state which of the 3 forms of market efficiency where we can earn normal & abnormal gains?
What you have written is correct. ‘Not efficient’ is where information is not reflected at all in the share price.
Normal and abnormal gains can be made when it is weak form efficient and semi strong form efficient.
Sir, There is a specimen MCQ on Market Efficiency and I am not sure about the answer that why it is considered NOT EFFICIENT AT ALL.
(Question) Gurdip plots the historic movements of share prices and uses this analysis to make her investment decisions.
(Solution) states that “Gurdip is basing her decision on technical analysis which means that she believes that stock market is not efficient at all.”
Please explain what does technical analysis is used for? [Is it used for looking at PAST TRENDS of the shares to identify the future expected MARKET VALUE OF THE SHARE to gain abnormal profit?]
And please also mention the fundamental analysis for what it is used for exactly? [Is it used for looking at the information such as Financial Statements, Reports, Company Prospectus, etc?]
These terms are really annoying!Technical analysis is making decisions based purely on past share prices and ignoring any other information.
Fundamental analysis is basing decisions on the future prospects of the company (using financial statements etc..)
Thanks for your reply 🙂
Sir in your response above (one before last response) u said we can earn normal & abnormal returns on weak efficient & semi-strong efficient markets. So, there arise few questions in my mind such as:
I have read on some website that we can make NORMAL gains on weak & semi-strong form efficient market BUT WE CAN”T make ABNORMAL gains on them. [Please Correct me here]
1) We can make normal & abnormal gains in weak form efficient as you said by studying public information BUT we can’t make normal & abnormal gains by studying & analyzing past trend movements [Correct?]
2) Semi-strong form efficient, HERE we can also make normal & abnormal gains by privately held Information BUT we can’t make normal & abnormal gains from Past Trends & Public Information [True?]
I APPRECIATE YOUR WORK! Sorry for putting forward like this, But I needed to be clear! 🙂
Your two numbered statements are correct.
However you are spending too much time worrying about normal and abnormal gains. As far as the exam is concerned (and there are never more than one or two questions on EMH in the exam – it is a pretty minor part of the syllabus), what matters is not the words ‘normal’ and ‘abnormal’ but simply that the more efficient the market is then the more all investors have access to information and the less chance there is of investors with ‘extra’ information making gains from that. That is why there are always attempts to make markets more efficient – the ideal situation being that all investors are making decisions based on the same information being available to them.
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