Proponents of EMH, even in its weak form, often or certain because they are passively managed (these funds simply attempt to match, not beat, overall market returns). Index investors might say they are adhering to the common saying, "If you can't beat 'em, join 'em." Instead of trying to beat the market, they will buy an index fund that invests in the same securities as the underlying benchmark index.
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. This is the name given to the tendency of markets, sectors or individual shares following a period of sustained under-or out-performance to revert to a long-term average by means of a corresponding period of out- or under-performance. This was picked up in detailed research by De Bondt and Thaler (1985), who showed that, if for each year since 1933 a portfolio of ‘extreme winners’ (defined as the best-performing US shares over the past three years) was constructed, it would have shown poor returns over the following five years, while a portfolio of ‘extreme losers’ would have done very well over the same period.
"efficient market hypothesis," , v.
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*Financial markets function with mathematical structure in time and thus occur nonrandomly.
*Free markets allocate financial resources and determine prices very inefficiently.
These findings completely devastate the EMH.
The Irrational Investor: Efficient Market Hypothesis
To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.
How The Efficient Market Hypothesis Works
Mark to Market Accounting
Under the method, it is possible to book the entire estimated value for all future contracted years on the day the contract was signed
It brings mismatch between profit and cash
Enron abuse it at the area where the value was even more subjective and tempting
The Efficient Market Hypothesis
The failure of market
It fail to assess adequately the earnings prospects at Enron
Price should have reflected diminished value of Anderson’s certification, complicated accounting.
Investment Risk and Return: Efficient Markets, Rational Investors
These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial , claims on claims. The elegance and apparent usefulness of the new theory led to a string of for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.