Definition
EMH, developed by Eugene Fama (Nobel Prize 2013), states that security prices incorporate all available information. Three forms: weak (prices reflect past trading data), semi-strong (prices reflect all public information), and strong (prices reflect all information including insider knowledge). If markets are efficient, active management cannot consistently beat passive indexing after costs. Behavioral finance challenges EMH's assumptions of rational investors.
lightbulb Example
If markets are semi-strong efficient, no amount of fundamental analysis can consistently beat the market because all public information is already priced in. The evidence: 85%+ of active managers underperform their benchmarks over 15+ year periods.
verified_user Key Points
- Three forms: weak, semi-strong, strong efficiency
- Implies active management cannot consistently outperform
- 85%+ of active managers underperform long-term
- Behavioral finance challenges EMH assumptions