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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 setEfficient setGraph representing a set of portfolios that maximize expected return at each level of portfolio risk. Efficient marketEfficient marketEconomy in which prices correctly reflect all relevant information. Internally efficient marketInternally efficient marketSee: Operationally efficient market Earnings response coefficientEarnings response coefficientA measure of relation of stock returns to earnings surprises around the time of corporate earnings announcements. Inefficient portfolioInefficient portfolioGroup of assets dominated by at least one other portfolio under the mean variance rule. For example, if A has both lower return and higher volatility than B, we say A is dominated by B. Further SuggestionsInformation Coefficient (IC)Coefficient of determination Efficient markets theory(EMT) Minimum efficient scale Efficient diversification Operationally efficient market Coefficient of Variation Efficient allocation Gini Coefficient Efficient capital market Regression coefficient Efficient market Efficient frontier Correlation coefficient |
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