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Efficient Market Hypothesis

1. How do you think efficient market hypothesis should impact the drafting of accounting standard
2. Does accounting really have predicting power?

Solution Preview

According to www.investopedia (2010), efficient market hypothesis is an investment theory that states it is impossible to 'beat the market' because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices; as such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

In addition, according to capitalflowanalysis.com (2010) this strange hypothesis (Efficient Market Analysis) states in essence, that because market players are so smart and correct information so widely distributed, the price determined by supply and demand in this efficient ...

Solution Summary

Efficient market hypothesis states, in essence that because market players are so smart and correct information so widely distributed, the price determined by supply and demand in this efficient market must be the same as the intrinsic value of the securities traded. Thus, according to this theory, it is impossible to 'beat the market' because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

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