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The Efficient Market Hypothesis - Research Paper Example

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This paper “The Efficient Market Hypothesis” attempts to verify the validity of the statement: Economic theory suggests that markets are efficient and that security prices are determined on the basis of fundamental value. The National Australia Bank (NAB) has been chosen for the purpose of the study…
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The Efficient Market Hypothesis
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The index reached its apex in early November 2007, close to 7,000 points, but it started to decline in early 2008 because of the sub-prime mortgage debt crisis. As of October 10, 2008, the index fell below 4,000 points, a drop of more than 42% from its 2007 peak. The Australia National Bank is an international financial services firm that engages in an offering of debt, risk management, and investment products for institutional investors. Through a division, MLC, it also provides wealth management and insurance to individuals.

Among the biggest in Australia, it has branches in Australia and New Zealand, as well as in the UK and the rest of Europe. It is headquartered in Melbourne, Australia. (See Hoover’s Profile, answers.com). It is well known that investors value stocks on the basis of expected cash flows and the risk involved. To do this, investors must have all the information they need and can use, which includes not only facts about a company but also opinions and beliefs surrounding or relevant to it. Therefore, information is the most important factor in the investor’s decision-making processes and is the central issue of the concept of efficient markets.

An efficient market is defined as one in which securities fully reflect all known information quickly and accurately (Jones 1991). Also, while fundamental analysis is the bedrock of any investment decision making, the efficient market theory – more specifically the weak form – shows that because the prices already reflect all available information, there is no advantage in doing fundamental analysis.  In fact, it has been shown that 80 percent of fund managers are underperforming the market indices such as the S&P 500.

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