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Efficient market theory |
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Efficient market theoryThe theory that claims that the current price of a share reflects everything that is known about the company and its future earnings potential, and that is it impossible to beat the market consistently.Efficient market theory suggests that the army of analysts and fund managers in the City whose job is to actively manage superior-performing portfolios are engaged in a futile exercise because everything they find out is rapidly transmitted around the market, and share prices instantly reflect the common knowledge. In other words, no one can get one up on anyone else. And the logical extension of this is that passive funds - tracker and index funds - are the best place to park your money, because their management costs are much lower and they are mathematically structured to match the performance of their chosen index.Plenty of people disagree with efficient market theory, and their ranks include people like Warren Buffett who has consistently produced returns of over 20% on his portfolio over a 30 year period.Similar MatchesEfficient markets theory(EMT)Efficient markets theory(EMT)Principle that all assets are correctly priced by the market, and that there are no bargains. Efficient marketEfficient marketA market in which, at a minimum, current price changes are independent of past price changes, or, more strongly, price reflects all (publicly) available information. Some believe foreign exchange markets to be efficient, which in turn implies that future exchange rates cannot profitably be predicted. Coefficient of VariationCoefficient of VariationA measure of investment risk that defines risk as the standard deviation per unit of expected return. Information Coefficient (IC)Information Coefficient (IC)The correlation between predicted and actual stock returns, sometimes used to measure the contribution of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship. Minimum efficient scaleMinimum efficient scaleThe smallest output of a firm consistent with minimum average cost. In small countries, in some industries the level of demand in autarky is not sufficient to support minimum efficient scale. Further SuggestionsGini CoefficientEarnings response coefficient Regression coefficient Efficient diversification Efficient set Efficient market Efficient capital market Correlation coefficient Efficient allocation Efficient frontier Coefficient of determination Inefficient portfolio Operationally efficient market Internally efficient market |
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