Efficient Market Theory

Individuals invest (buy assets or securities) in the stock market in order to make money. The premise is to buy low and sell higher than the price that was originally paid. Although that idea sounds reasonable, the prevailing view is that “you can’t beat the market” because the market is efficient and so will always win. The concept of market efficiency had been anticipated as early as 1900 by Bachelier in his mathematics dissertation. Cowles (1933) found that there was no discernable evidence of any ability to outguess the market.

The efficient market approach has been the central position in finance for more than forty years. Fama (1970) defined an efficient market as one in which security prices always reflect available ...

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