An efficient market is one where the market price is an unbiased estimate of the true value of the investment.
An efficient market is one where the market price is an unbiased estimate of the true value of the investment.
Alhough this is the broadly accepted definition, it is not required this happens at every point in time; instead, it is required that market price errors are unbiased, as, for instance, that the price can be greater than or less than the true value, as long as such deviations are random.
According to the market efficiency definition as given by Fama (1970), the market efficiency can be of 3 kinds:
- Weak form: the current price reflects the information contained in all past prices, suggesting that charts and technical analyses that use past prices alone would not be useful in finding under valued stocks;
- Semi-strong form: the current price reflects the information contained not only in past prices but all public information (including financial statements and news reports) and no approach that was predicated on using and massaging this information would be useful in finding under valued stocks;
- Strong form: the current price reflects all information, public as well as private, and no investors will be able to consistently find under valued stocks;
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