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CHAPTER NINE THE EFFICIENT MARKET HYPOTHESIS CHAPTER OVERVIEW This chapter examines the concept of market efficiency, that is, in general, securities are fairly priced and one cannot expect to outperform the market, risk-adjusted consistently over time. The implications of market efficiency for investors and studies of the efficient capital market hypothesis are presented in detail. LEARNING OBJECTIVES After studying this chapter, the student should thoroughly understand the concept of market efficiency and how to make rational investment decisions based upon the existence of market efficiency. The student also should have a thorough understanding of the many tests of market efficiency, the forms of market efficiency, and observed market anomalies. PRESENTATION OF MATERIAL 1. Concepts of Market Efficiency and Random Walk The basic notion of an efficient market is addressed in T 9-2. The issue of efficiency centers on stock prices reflecting information. The notion of market efficiency is important in corporate finance as well as in investments. If markets are highly efficient, investors can be more certain that stock prices are accurate or that stocks are fairly priced. T 9-2 Efficient Market Hypothesis The notion of a random walk market implies that changes in stock prices are random. We actually expect there to be a positive trend in stock prices with random movements about those positive trends.
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This note was uploaded on 10/28/2009 for the course MBA MBA608 taught by Professor Martin during the Spring '09 term at Beirut Arab University.

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