Efficient Market Hypothesis (EMH)

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Definition of 'Efficient Market Hypothesis (EMH)'

The efficient-market hypothesis (EMH) is a theory in financial economics that states that asset prices reflect all available information. This means that markets are efficient at processing new information and that prices adjust quickly to reflect new information. As a result, it is impossible to consistently outperform the market by trading on information.

The EMH has been a controversial topic in finance since it was first proposed by Eugene Fama in 1970. Some economists believe that the EMH is a valid theory, while others believe that it is too simplistic and that markets are not as efficient as the EMH suggests.

There are three main versions of the EMH:

* The weak form of the EMH states that past prices cannot be used to predict future prices. This means that technical analysis, which attempts to predict future prices based on past price movements, is not a valid method of investing.
* The semi-strong form of the EMH states that all publicly available information is reflected in prices. This means that fundamental analysis, which attempts to value stocks based on their financial statements and other publicly available information, is not a valid method of investing.
* The strong form of the EMH states that all information, both public and private, is reflected in prices. This means that even insiders who have access to private information cannot consistently outperform the market.

The EMH has a number of implications for investors. If the EMH is true, then it means that there is no way to consistently outperform the market. This means that investors should focus on investing for the long term and should not try to time the market.

The EMH has also been used to justify the high fees charged by active mutual funds. If the EMH is true, then active mutual funds cannot consistently outperform the market, and their high fees are a waste of money.

The EMH is a controversial theory, and there is still debate about whether it is valid. However, the EMH has had a significant impact on the way that investors think about the market.

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