What Is The Efficient Market Theory Approach of Making Investment Decisions?


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Investment Decisions 2

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Efficient Market Theory Approach: The efficient market theory approach is based on efficiency of the capital market. It believes that market is efficient and information about individuals stocks is available in the market. In the ideal efficient market everyone knows all the possible-to0knoe information simultaneously interpret it similarly and behaves rationally. Each investor has equal information about the stock and prices of each security. Therefore, it is assumed that no investor can continuously make profits on stock prices. These securities will provide similar returns at the same risk level.

Thus, portfolio analyst feels that market cannot be influenced by a single investor. They feel that there is risk involved in managing a portfolio. Therefore, they try to diversify between different risks classes of securities. If they are positive towards the market, they establish a portfolio of risk choice that has higher risk and return than the market. The modern portfolio management is based on the random walk model which means that successive price changes are independent.

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