The concept of market efficiency has several important implications for investors:
1. Passive vs. Active Investing: Market efficiency supports the idea of passive investing, where investors seek to replicate the performance of a market index, such as the S&P 500, rather than trying to beat the market through active stock selection.
2. Diversification: Since stock prices reflect all available information, diversification becomes essential in reducing unsystematic risk (company-specific risk) while capturing market returns.
3. Efficient Market Hypothesis Critiques: While the EMH is widely accepted, it has faced criticism.
Some argue that markets may not always be perfectly efficient due to behavioral biases, market frictions, and irrational investor behavior.
4. Market Anomalies: Some studies have identified certain market anomalies that appear to contradict market efficiency.
These anomalies, such as the small-cap effect or the value premium, are areas where some investors have historically outperformed the market.
– – – – –
Extracted from «The Global Manual of Foreign Direct Investments», Volume 1, Chapter 1.12, Pag. 97
Author page: https://lnkd.in/eRnByQca
