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Efficient Market Hypothesis【Deric Business Class】 - YouTube
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hey guys welcome to derek business class
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in this video i'm gonna talk about
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efficient market hypothesis efficient
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market hypothesis EMH it is also called
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efficient market theory
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EMH states that share prices fully
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reflect all information which means when
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there is a good news share price will go
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up if there is a bad news share price
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will go down
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stocks are always traded at fair value
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making it impossible for investors to
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purchase undervalued stocks or sell
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stocks for inflated prices in other
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words it should be impossible to
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outperform the market through expert
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stock selection or market timing whoever
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that is trying to forecast the share
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price to go up or down their forecasts
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will fail the only way an investor can
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obtain higher returns is by purchasing
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riskier investments however the market
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is not always efficient let's compare
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the reaction of stock price to new
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information in both efficient and
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inefficient markets when there is a good
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news under efficient market reaction the
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price instantaneously adjusts to and
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fully reflects new information there is
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no tendency for subsequent increases and
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decreases but sometimes there will be
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delayed reaction it happens when the
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price partially adjusts to the new
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information for example 8 days elapsed
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before the price completely reflects the
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new information in other words investors
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take 8 days to respond to the good news
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another extreme is that overreaction and
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correction it happens when the price
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over adjusts to the new information it
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overshoots the new price and
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subsequently corrects in other words
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investors overly react to the good news
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that's why we have three forms of market
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efficiency first strong form of capital
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market efficiency it means current
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prices reflect all information including
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historical public and private
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information that can possibly be known
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to anyone so there is no information
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that allows investors to consistently
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earn abnormally high returns even
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insider information is of little use
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but according to empirical evidence
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markets are not strong form efficient
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second semi strong form of capital
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market efficiency it means current
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prices reflect all publicly available
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information so abnormally large profits
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cannot be consistently earned using
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public information in other words
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fundamental analysis is of little use
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however if the market is semi strong
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form efficient insider information or
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private information may help in making
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abnormal profits but insider trading is
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illegal
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third weak form of capital market
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efficiency it means current prices
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reflect only the information contained
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in past prices so past data on stock
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prices are of no use in predicting
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future stock price changes in other
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words technical analysis is of little
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use if the market is wheat form
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efficient investors may make abnormal
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profits by conducting fundamental
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analysis according to empirical evidence
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markets are generally wheat form
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efficient in most countries
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as a summary weak form includes all past
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information semi strong form includes
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all public information whilst strong
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form includes all relevant information
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under strong form efficient no investor
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should be able to earn abnormal return
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under semi strong and weak form
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efficient no investor can consistently
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or an abnormal return if sometimes
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investors are an abnormal return it's
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still possible random walks and
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efficient markets have some connections
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random walk hypothesis argues that stock
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price movements are random and
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unpredictable so there is no way to know
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where prices are headed studies of stock
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price movements indicate that they do
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not move in neat patterns it is unlikely
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to find a fixed pattern or equation for
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stock price movements when new
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information arrives prices react and
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stunt aeneas Lee to it since new
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information cannot be predicted it would
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arrive at random points in time
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therefore stock price movements would be
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random as well this could be an
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indication that markets are highly
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efficient and respond quickly to the
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changes in the current situation
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to have an efficient market it is
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assumed that there are many
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knowledgeable investors active in
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analyzing and trading stocks information
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is widely available to all investors and
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it is free and easy to obtain
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information events such as labor strikes
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or accidents tend to happen randomly
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investors react quickly and accurately
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to new information causing prices to
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adjust the following will be the
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implications of EMH first in an
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efficient capital market the transfer of
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assets occurs with little loss of wealth
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so when you buy or sell an investment
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the loss and value will be minimal
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second in such markets prices reflect
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all available information thus financial
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asset prices or fair prices which means
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they are neither too high nor too low
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third future market prices cannot be
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predicted based on available information
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fourth stock price movements are random
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and unpredictable fifth investors are
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rational which means they receive
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interpret and react to the information
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in similar manner sixth no one can
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consistently beat the market which means
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it's impossible to consistently make
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abnormal profit abnormally high returns
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earned by pure chance
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seventh investments in these markets
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have a zero NPV whereby the expected
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rate of return equals the required rate
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of return and the expected rate of
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return compensates the investor for the
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risk born
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are some common misconceptions about EMH
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first EMH does not mean that you can't
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make money from investments or
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investments in the market a riskless do
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to correct price reflection in fact EMH
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will not protect you from making wrong
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choices if you do not diversify remember
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don't put all your eggs in one basket
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second
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EMH does mean that on average you will
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earn a return appropriate for the risk
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undertaken and there is no bias in
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prices that can be exploited to earn
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excess returns
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alright that's all for this video thanks
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for watching see you in the next one bye
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