Our discussion thus far has focused on expected stock prices and expected rates of return.Anyone who has ever invested in the stock market knows that there can be, and theregenerally are, large differences between expected and realized prices and returns.Figure 5-5 shows how the market value of a portfolio of stocks has moved in recent years,and Figure 5-6 shows how total realized returns on the portfolio have varied from year toyear. The market trend has been strongly up, but it has gone up in some years and down inothers, and the stocks of individual companies have likewise gone up and17Market efficiency also has important implications for managerial decisions, especiallythose pertaining to common stock issues, stock repurchases, and tender offers. Stocksappear to be fairly valued, so decisions based on the premise that a stock is undervalued orovervalued must be approached with caution. However, managers do have betterinformation about their own companies than outsiders, and this information can legally beused to the companies’ (but not the managers’) advantage.We should also note that some Wall Street pros have consistently beaten the market overmany years, which is inconsistent with the EMH. An interesting article in the April 3, 1995,issue of Fortune (Terence P. Paré, “Yes, You Can Beat the Market”) argued strongly againstthe EMH. Paré suggested that each stock has a fundamental value, but when good or badnews about it is announced, most investors fail to interpret that news correctly. As a result,stocks are generally priced above or below their long-term values.
