The efficient-market hypothesis proposes that financial markets are informationally efficient and that the prices of stocks and bonds reflect all available information at any given time. Eugene Fama first outlined this theory in 1970, stating that asset prices reflect all available information and it is impossible to consistently outperform the market on a risk-adjusted basis. The EMH comes in three forms - weak, semi-strong, and strong - based on what information is reflected in market prices. While the EMH is influential, some critics argue that certain investors like Warren Buffett have been able to consistently beat market returns over the long run.

1. EFFICIENT MARKET
HYPOTHESIS
BY: RASHI VISHNOI

2. HISTORY
The theory was given by Eugene Fama, a
University of Chicago professor and
Nobel Prize winner.
In 1970, Fama published “Efficient Capital
Markets: A Review of Theory and Empirical
work”, which outlined this theory.

3. MEANING
The efficient-market hypothesis is a
hypothesis in financial economics
that states that asset price reflect all
available information.
A direct implication is that it is
impossible to “beat the market”
consistently on a risk-adjusted basis
since market price should only react
to new information.
EMH

4. The theory says that stock trades at fair value
all time.
EMH suggests that it is impossible to find
undervalued stocks or sell it at premium.
It suggests that fundamental or technical
analyses are not useful under EMH.

5. Weak
3 FORMS OF EMH
All Historical
Prices & Returns
Semi-Strong
All Public Information
Strong
All Information,
Public & Private

6. Investors act Rationally &
Normal.
Relevant information is
available freely.
ASSUMPTIONS
OF THEORY

7. CRITICISMS
OF EMH
Warren Buffett, Paul
Tudor Jones, John
Templeton, and Peter
Lynch have always
beaten the market returns
in long run.
Those against EMH say
that a few financial
events could push the
stock away from their
fair value in a single day.
MARKET

8. IT’S
IMPLICATIONS
Individual Investors:
“Beating The Market” Consistently is
Virtually Impossible.
Focus on Well-Diversified Portfolios.
Portfolio Managers:
Active Management Strategies Unlikely to
Outperform Passive Strategies Consistently.

9. Corporate Finance:
Company’s Stock is Always Fairly Priced; Indifference
Between Issuing Debt and Equity.
No Impact on Company Value From Financial Decision.
Government Regulation:
Support for Policies Promoting Transparency and
Information Dissemination.
Justification for Prohibiting Insider Trading.