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Efficient Market Hypothesis and Random Walk

One of the investment theories stated that it is impossible to "beat the market" because
stock market efficiency causes existing share prices to always incorporate and reflect all relevant
information. There are three versions of the main hypothesis: "weak ", "semi- strong" and
"strong." Weak form of efficiency claims that the current stock prices already reflect all
historical market data such as the past prices and trading volumes (Bodie, Kane & Marcus, 2007).
EMH semi-strong parties claimed that prices reflect all publicly available information and prices
instantly change to reflect new public information. Strong form efficient market hypothesis also
claims that prices instantly reflect even hidden or "insider" information. . In such a market, prices
would always be fair and any investor, even insider traders, cannot beat the market (Brealey,
Myers & Marcus, 1999).
Whereas, random walk is one in which future steps or directions cannot be predicted on
the basis of past actions. When the term is applied to the stock market, it means that short-run
changes in stock prices cannot be predicted. Investment advisory services, earnings forecasts and
complicated chart patterns are useless.
The efficient market hypothesis (EMH) that the market price reflects all available
information. It developed by Samuelson and Fama in the 1960s, who idea has been widely
applied to the empirical study of theoretical models and prices of financial securities, resulting in
a great deal of controversy, as well as prices of basic insights into the discovery process. Ten
years after Samuelson (1965) and Fama (1965a, 1965b, 1970) landmark paper, a lot of people
extend their framework for risk-averse investors, resulting in a "neo-classical" version the
efficient market hypothesis where price changes, weighted by the total marginal utility
appropriate, must be unpredictable (Leroy, 1973; Rubinstein, 1976 ; Lucas, 1978). According to
Lucas (1978), all investors are "rational expectations", the price fully reflects all available
information and prices follow a martingale weighted marginal utility in the market. The efficient
market hypothesis is extended in many other directions, including its non-listed assets such as
human capital, registered state-dependent preferences, investor heterogeneity, asymmetric
information and transaction costs of the establishment. But the general direction is the same:
individual investors form rational expectations and efficient sales summary information, and the
equilibrium price contains all the information available instantly.
The efficient market hypothesis (EMH) is a back breaker for forecasters or investors. In
an efficient market, equity research and assessment will not provide any benefit expensive task.
The odds of finding an undervalued stock should be random (50/50). At best, the benefits from
information collection and equity research would cover the costs of doing the research. Besides
that, a strategy of randomly diversifying across stocks or indexing to the market, carrying little or
no information cost and minimal execution costs, would be superior to any other strategy that
created larger information and execution costs. There are no value-added portfolio managers and
investment strategies.
The perception that prices do not fully reflect some information can lead the investors to
adopting portfolio strategies designed to reap abnormal profits by exploiting the informational
inefficiency. On the other hand, the investors may be unwilling to trade in securities if it is felt
that the information is possessed by others. They might leave these markets to invest elsewhere,
or they might reduce the total amount invested. Besides that, the information intermediaries will
gather information and make profits, because there will exist a big demand for information, as
the information is not reflected in prices as it should be.
Although the efficient market hypothesis is a useful heuristic concept may reveal some
light trading and markets, I believe that a more reasonable explanation for the majority of
investors cannot outperform the market, especially in active trading, because there so many
factors affect the price of most investment products, no one can know and quantify all these
factors, what price will arrive in the future.