Chapter 11 – The Efficient Market Hypothesis
11-1
CHAPTER ELEVEN
THE EFFICIENT MARKET HYPOTHESIS
CHAPTER OVERVIEW
This chapter examines the concept of market efficiency— securities are fairly priced and an investor
cannot expect to outperform the market, risk-adjusted, consistently over time. The implications of market
efficiency for investors and studies of the efficient capital hypothesis are presented in detail.
LEARNING OBJECTIVES
After studying this chapter, the student should thoroughly understand the concept of market efficiency
observed market anomalies.
PRESENTATION OF MATERIAL
11.1 Random Walks and the Efficient Market Hypothesis
The basic notion of an efficient market is addressed in this first section. The issue of efficiency centers on
stock prices reflecting information. The notion of market efficiency is important in corporate finance as
11.2 Implications of the EMH
The implications for the different forms of market efficiency are covered in this section. If markets are
weak form efficient, technical analysis such as charting, should not result in superior profits. If markets
Chapter 11 – The Efficient Market Hypothesis
Even when markets are efficient, portfolio management is required. The appropriate risk level will vary
over an investor’s life. Tax considerations will call for different types of securities to be included in the
portfolio. Other considerations could be related to reinvestment risk associated with cash flow or
considerations related to diversifying employment related risk.
11.3 Event Studies
11.4 Are Markets Efficient?
11.5 Mutual Fund and Analyst Performance
The results on performance of analysts show some positive abnormal performance but trading costs
following analysts’ recommendation may eliminate any excess profits. Some recent studies on mutual