The Efficient Market Hypothesis (EMH) is a financial theory stating that asset prices fully reflect all available information, making it impossible for investors to consistently achieve returns exceeding the market average on a risk-adjusted basis. EMH is categorized into three forms: weak, semi-strong, and strong, which vary in how information is reflected in prices. Key assumptions include rational investor behavior, quick information availability, and random price movements, implying that stock prices follow a random walk and predicting future prices based on past trends is futile.

1. Efficient Market
Hypothesis (EMH)
Definition and assumption

2. Definition Of EMH:
• Efficient market hypothesis or EMH is an investment theory which suggests that the prices of financial instruments reflect
all available market information.
• The Efficient Market Hypothesis (EMH) is a financial theory that asserts that asset prices in financial markets fully reflect
all available information at any given time. According to EMH, it is impossible for investors to consistently achieve returns
that exceed average market returns on a risk-adjusted basis because prices always incorporate and reflect all relevant
information.
• This implies that stock prices follow a random walk, and any attempt to outperform the market through stock picking or
market timing is futile unless done by chance.
• EMH is typically categorized into three forms: weak, semi-strong, and strong, each reflecting the degree to which
information is reflected in prices.
• Hence, investors cannot have an edge over each other by analysing the stocks and adopting different market timing
strategies. According to this theory developed by Eugene Fama, investors can only earn high returns by taking more
significant risks in the market.

3. Continued..
• The Efficient Market Hypothesis (EMH) is a financial theory that asserts that asset prices in
financial markets fully reflect all available information at any given time.
• According to EMH, it is impossible for investors to consistently achieve returns that exceed
average market returns on a risk-adjusted basis because prices always incorporate and reflect
all relevant information.
• This implies that stock prices follow a random walk, and any attempt to outperform the
market through stock picking or market timing is futile unless done by chance. EMH is
typically categorized into three forms: weak, semi-strong, and strong, each reflecting the
degree to which information is reflected in prices.

4. • The Efficient Market Hypothesis (EMH) posits that financial markets are "informationally efficient," meaning that
prices of securities reflect all available information at any given time, making it impossible for investors to consistently
achieve higher returns than the market average on a risk-adjusted basis (Fama, 1970). This theory rests on several key
assumptions:
1. Rational Investors: EMH assumes that investors behave rationally, meaning they analyze all available information and
make decisions that maximize their utility. If some investors act irrationally, their trades are offset by rational investors
who correct any mispricings (Malkiel, 2003).
2. Information Efficiency: The hypothesis assumes that information is freely and quickly available to all market
participants, and that prices adjust immediately to reflect new information. This ensures that no arbitrage
opportunities exist for long (Fama, 1970).
3. Random Price Movements: EMH assumes that stock prices move randomly and cannot be predicted based on past
trends. This is because new information enters the market unpredictably, and it is quickly incorporated into asset
prices (Malkiel, 2003).

5. • Another definition of the Efficient Market Hypothesis (EMH) suggests that financial markets are
considered efficient when security prices at any given time reflect all available information,
rendering it impossible to consistently achieve abnormal returns.
• This perspective highlights that any new information relevant to asset pricing is quickly and
accurately incorporated into prices, making it difficult to exploit information to gain a
competitive advantage ( Jensen, 1978). As a result, according to the EMH, no investment strategy
can systematically outperform the market in the long term unless it involves taking higher risks.
• This interpretation also reinforces that asset prices follow a "random walk," meaning that price
changes are independent of past prices, and attempts to predict future price movements based
on historical data are futile (Bodie, Kane, & Marcus, 2014).