FMP
Nov 1, 2023 10:34 AM - Parth Sanghvi
Image credit: Dylan Calluy
The Efficient Market Hypothesis (EMH) is a theory in financial economics that states that asset prices reflect all available information. This means that it is impossible to "beat the market" consistently on a risk-adjusted basis.
The EMH is based on the assumption that all investors have access to the same information and that they act rationally. This means that if there is any new information that could affect the price of an asset, it will be incorporated into the asset's price very quickly.
The EMH is typically divided into three forms:
The EMH has a number of implications for investors. First, it means that it is impossible to "beat the market" consistently on a risk-adjusted basis. This is because any information that could give an investor an edge is already reflected in the market price of assets.
Second, the EMH implies that investors should focus on investing in a diversified portfolio of assets. This is because diversification helps to reduce risk and maximize returns.
Third, the EMH implies that investors should have a long-term investment horizon. This is because it can take time for the market to fully incorporate new information into asset prices.
The Efficient Market Hypothesis is an important concept for investors to understand. It has a number of implications for how investors should invest their money.
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