Introduction: Portfolio Management in an Efficient Market Context

I.
Introduction:
Portfolio Management in an Efficient Market Context
A. Efficient
market refers to the market form where the investors are rational and that everyone
has the uniform information on the stock and on the movement of the price. This
avoids the stock prices to be biased on any particular section of the society.
The objective of this paper is to study on the different forms of efficient
market and how it is different from one another.
II.
Body
of Paper-

Efficient
market is a market in which investors are considered to be rational and it
indicates that the prices of the security are not biased towards any particular
group or individual. In should be noted here that un-biasness does not means
that price of the security should not always means that the price of the
security should always be equal to the intrinsic value of the security. However
any deviation from the intrinsic value is considered to be rational.
There
are three forms of efficient market –
·
Strong form efficient
market
·
Weak form efficient
market
·
Semi-strong efficient
market
Strong form efficient
market is one of three forms of efficient
market suggested by Eugene Fama. As per the theory this form of market reflects
all public and private information are reflected in the price of the security.
However this assumption of this market is considered to be un-justified as this
kind of market is not available in the real world.
In
a semi strong efficient market the
price of the stock adjust itself for all the publically traded information
available in the market thus the prices reflects two information i.e. the
information about past volume and prices and all the publically traded
information.
Weak
form efficiency is a market form
wherein the price of security is impacted by the historic price and the volume
of trade. Under this theory there is no impact of the company specific
information on the market price.
It
is stated by many authors that efficient market hypothesis has been wrongly
understood by many people. Some of the most common misconceptions are stated as
under –
1. It
always assumes that market can forecast all the events perfectly. However what
the theory states that all information is available not the forecasting ability
is perfect.
2. It
is said that with the fluctuation in price the true value cannot be reached. It
should be noted here that price fluctuate in order to adjust itself with the
correct value.
3. As
the information’s entire are available in the market both public and private as
a result of which the institutional portfolio managers are not able to achieve
superior investment performance. It should be understand here that in an
efficient market it is not possible in general to earn superior profit.
4. Some
of the scholars states that random movement of stock price indicates that the
market is not rational. However this is not always true as there are two
different things randomness and irrationality thus if the investors are
rational prices will change in random.
III.
Summary
Thus, efficient
market is an ideal form of market of market. However, in practice these form
are difficult to have as there are several information’s that are available in
pockets and are not available uniformly to all people.

IV.
Reference
The Myth of the
Rational Market: A History of Risk, Reward, and Delusion on Wall Street
Paperback – February 8, 2011 by Justin Fox
The Efficient
Market Hypothesists: Bachelier, Samuelson, Fama, Ross, Tobin and Shiller (Great
Minds in Finance) by Colin Read
Efficient Market
Hypothesis: Weak-Form EMH FTSE Perspective Kindle Edition by Jason Rong