Sample Essay

Efficiency of market is the degree to which the market or share prices reflect all available relevant information. When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return but also to outperform, or beat, the market.

However, market efficiency – championed in the efficient market hypothesis (EMH), formulated by Eugene Fama in 1970 – suggests that, at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. As an illustrative example of the EMH hypothesis, consider a world where each global event causes an instantaneous reaction in the market. Such a stock market would then be considered EMH compliant – as against a universe where stock markets do not exhibit sensitivity to global events.

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