Efficient Market Hypothesis (EMH)

The efficient market hypothesis (EMH) is a theory in finance that suggests that financial markets are efficient, meaning that prices reflect all available information. In other words, the hypothesis suggests that it is impossible to consistently beat the market by making trades based on publicly available information because prices already reflect that information.

According to the EMH, it is impossible to outperform the market consistently over the long term, as any new information that becomes available is quickly reflected in the price of the asset. Therefore, it is believed that it is not possible to consistently identify mispricings or undervalued assets and generate profits.

However, the efficient market hypothesis has been subject to criticism and debate. Critics argue that the EMH may not accurately reflect the reality of financial markets, as markets can be influenced by irrational behavior, insider trading, and other factors that may cause prices to deviate from their fundamental values.

Despite its limitations, the efficient market hypothesis has played a significant role in shaping modern financial theory and continues to be widely studied and debated by economists and finance professionals. It has also contributed to the development of passive investing strategies, such as index funds and exchange-traded funds (ETFs), which aim to replicate the performance of a market or index rather than attempting to outperform it.

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