📈 Equity Investments

Efficient Market Hypothesis (EMH) — Weak, Semi-Strong & Strong Forms

Efficient Market Hypothesis explained. Three forms of market efficiency — weak, semi-strong, and strong — with evidence, anomalies, and implications.

Key Concepts

Efficient Market Hypothesis (EMH)

Security prices fully reflect all available information. Prices adjust rapidly to new information.

Weak Form

Prices reflect all past market data. Technical analysis cannot earn excess returns.

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Formulas

Master Formula Sheet -- Equity Investments

DDM (Gordon Growth)

V₀ = D₁ / (r - g)

Constant growth dividend model

Required Return (DDM)

r = (D₁/P₀) + g

Dividend yield + growth rate

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Decision Frameworks

Implications for investment strategy?

Use when:

  • Weak efficient: fundamental analysis can work, but not technical
  • Semi-strong: only insider info gives edge; use passive strategies
  • Strong efficient: no analysis adds value; index everything

Avoid when:

  • Assuming perfect efficiency — real markets have frictions

Test Your Understanding

Under the semi-strong form of EMH:

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