Weak Form of Market Efficiency
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The weak form of market efficiency posits that stock prices reflect all past public information, suggesting that investors cannot achieve substantial long-term gains through past price data. Technical analysis is deemed ineffective under this model, whereas fundamental analysis may help identify stock undervaluation or overvaluation. Limitations of this approach are highlighted through an example of an investor successfully leveraging fundamental analysis for short-term gains.
Weak Form of Market Efficiency
- 1. By:- eFinanceManagement.com https://efinancemanagement.com/investment-decisions/weak-form-of-market-efficiency Weak Form of Market Efficiency
- 2. 1. Meaning 2. How does it Works? 3. Limitations 4. Example 5. Reference Content
- 3. The weak form of market efficiency is the weakest form of this Hypothesis model. According to the EMH theory, the price of a publicly-traded asset or security is a reflection of all the past information that is available to the general public. There is no possibility of any investor earning windfall profits or substantial gains out of the line in the long run. This is so because each and every investor already has information about the security from the historical events. Meaning
- 4. The weak form implies that prevailing market prices of a stock or security have factored all the past and historical price data. Moreover, any further technical analysis of any form will not help the investor in his decision for that particular stock or security. The only help he can have is from the fundamental analysis. That only can help the investor to find out the undervaluation or overvaluation of the prevailing price. How does it Works?
- 5. • Assumptions may not be correct • Each investor react to market news differently • Can’t rely on past information • A high-return provider stock will give much lower returns in the coming years to arrive at the average. • A low-return provider will give higher returns in the upcoming years to average out the returns. Limitations
- 6. Mr. A is planning to invest in the stock of a major automobile company which is doing well with a consistent increase in the demand for its products quarter after quarter. As per his fundamental analysis of the company, everything is indicative of an upward movement in the price of the stock of the company. Mr. A buy the stock of the company just before the quarterly results are due & expects the price to shoot up. On the day of the declaration of the result, the stock actually goes up & hence Mr. A is able to make short-term gains from the situation according to his analysis. Example
- 7. Reference To know more about it, click on the link given below: https://efinancemanagement.com/investment-decisions/weak-form-of-market-efficiency