W. Sean Cleary, CFA

Kingston, Canada

Howard J. Atkinson, CFA

Toronto, Canada

Pamela Peterson Drake, CFA

Harrisonburg, VA, U.S.A.


After completing this chapter, you will be able to do the following:

  • Discuss market efficiency and related concepts, including their importance to investment practitioners.
  • Explain the factors affecting a market’s efficiency.
  • Distinguish between market value and intrinsic value.
  • Compare and contrast the weak-form, semistrong-form, and strong-form market efficiency.
  • Explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management.
  • Discuss identified market pricing anomalies and explain possible inconsistencies with market efficiency.
  • Compare and contrast the behavioral finance view of investor behavior with that of traditional finance in regards to market efficiency.


Market efficiency concerns the extent to which market prices incorporate available information. If market prices do not fully incorporate information, then opportunities may exist to make a profit from the gathering and processing of information. The subject of market efficiency is, therefore, of great interest to investment managers, as illustrated in Example 3-1.

EXAMPLE 3-1 Market Efficiency and Active Manager Selection

The chief investment officer (CIO) of a major university endowment fund has listed eight steps in the ...

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