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Market Efficiency Theory

The theory of market efficiency is based on the premise that a market is considered efficient when stock prices are an actual reflection of information known about a company. U.S. markets are generally viewed as semi-strong form market efficient.

QUESTIONS:

What would happen if U.S. markets became less efficient?

What might lead to markets becoming less efficient?

How do markets in other countries compare to the U.S. in terms of efficiency?

Please include references.

Solution Preview

What would happen if U.S. markets became less efficient?

If US markets would become less efficient, it would be difficult for investors to predict the future market pattern on the basis of historical information alone or in other words, charts and historical patterns alone will not help an investor to find undervalued stocks. There will be incentive for investors to spend time and money on gathering information for earning higher ...

Solution Summary

Discusses efficiency of capital markets.

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