Page 152 - A Canuck's Guide to Financial Literacy 2020
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Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) is an investment theory that states all relevant
information at a given time of a particular security is already reflected in its price.
The hypothesis is thought to have been derived from the “Random Walk Hypothesis” which
states that stock prices are a random walk and can’t be predicted. Thus, it is impossible to
generate returns higher than the market because all current and relevant information is
already reflected in the share price. There are three forms EMH:
▪ Weak Form Efficient Market
▪ Semi-Strong Efficient Market
▪ Strong Form Efficient Market
Weak Form Efficiency
Weak form efficiency states that all past market data, prices, news releases are reflected in
the current share price. Technical analysis will not determine the future price of the security
and no pattern exist. In a weak form of market efficiency, only fundamental analysis and
non-public information can help you earn an excess return.
