Market Efficiency
Market efficiency refers to the degree to which market prices reflect all available information about an asset. In an efficient market, asset prices fully incorporate all public and private information, ensuring that securities are fairly priced at any given moment.The Efficient Market Hypothesis (EMH) is the theoretical foundation of market efficiency, stating that it is impossible to consistently outperform the market because prices already reflect all known information.
Example
If a company’s quarterly earnings report is released and its stock price immediately adjusts to reflect the new information, this indicates an efficient market.
Key points
• Refers to the extent to which market prices reflect all available information about an asset.
• Based on the Efficient Market Hypothesis (EMH).
• In an efficient market, securities are fairly priced, and it is difficult to outperform the market consistently.
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