Efficient Market Theory

efficient market hypothesis

market prices fully reflect all available information about an investment so that market prices represent very good estimates of intrinsic value

market efficiency

the degree to which market prices reflect all available, relevant information, so as to reflect the intrinsic value of the investment

weak form market efficiency

market prices already reflect all information contained in the history of past trading (such as past prices and trading volume)

semi strong form market efficiency

market prices already reflect all publicly available information (such as financial statement data)

strong form market efficiency

market prices already reflect all relevant information including inside information (such as private information)

random walk

changes in the price of a stock are random and unpredictable because (1) prices only depend on new information due to competition and (2) new information is unpredictable and random

passive portfolio management

an investment strategy that purchases a well-diversified portfolio that (1) has minimal buying and selling, (2) holds the portfolio for a long time, and (3) does not attempt to find good investment opportunities

active portfolio management

an investment strategy that attempts to find good investment opportunities by (1) using various types of analysis, (2) has frequent buying and selling, and (3) has the goal of outperforming the "average investor"

beating the market

achieving an investment return that exceeds the performance of the average stock portfolio over a long period of time

mispricing

when the market price of an investment differs from its intrinsic value, often due to incorrect or incomplete information, investor sentiment, or other market inefficiencies

financial market bubble

a rapid escalation in the market price of an investment to levels significantly above its intrinsic value