Halden Zimmermann | Efficient Market Capital Hypothesis

Efficient Market Hypothesis Explanation

The efficient market hypothesis is based on the notion that information is shared with all individuals looking to profit from it equally. Therefore information advantage is considered constant and moot when investing. Public information is immediately absorbed into the price making it difficult to beat the market by relying on public information. If you do beat the market it is because an increased risk was taken, not because the information was any better or worse than what the next person had.

This hypothesis also states that a passive strategy should be taken, long term investing instead of a reactive strategy. The entire day trader philosophy is destroyed by this theory and was actually correct, because when the US stock market showed dollar cost average losses day trading became almost extinct. This strengthens the theory that the trend lines are predictable with securities but the changes around these are not. This is where the day traders were caught, there was a 2 year trend line of positive growth that most did well when investing along, however the turn came so suddenly investors lost fortunes.

Efficient Market Response

Airline Industry Analysis:

Reviewing the current state of the airline industry and making an investment choice based on the public information that is available to strengthen your portfolio would be fruitless. The market price is already set by the market information and tentativeness associated with recent terrorist events. This means that you should hold if you already own airline stocks and only buy if you think that the long term the investment strategy complements your portfolio.



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