Investments

Three forms of market efficiency: Weak-form, Semi-strong form, and Strong-form.
The central concept is how much information is already reflected in prices. Strong-form efficiency claims prices reflect all information (public or private), making it impossible to beat the market.

Theoretically, efficient markets show instant price adjustments to "true" values upon new information release.
In reality, markets exhibit delayed reactions or overreactions followed by corrections, which active managers try to exploit.
The Tesla-Twitter acquisition served as a case study: Tesla's stock dropped from approx. $P<em>{\text{initial}} \approx 330$ to $P</em>{\text{mid}} \approx 225$ (about a 32% drop) after the announcement, exhibiting an "overreaction and correction" pattern over subsequent months.

Public information: Universally available (e.g., news).
Private information: Known only to insiders (e.g., managers, CEOs).
Informed traders use public information, which is legal.
Insider trading is generally illegal when based on material nonpublic information for profit, though legal under strict, reported conditions.
- Illegal insider trading: Using nonpublic material information for personal gain.
- Legal insider trading: Regulated and reported to the SEC.
A Tippee trades on nonpublic information received from an insider (tipper) and may be liable.
Martha Stewart Case: Illustrated the legal risks of trading on nonpublic information, as she faced charges after selling shares based on a tip about an FDA drug rejection before the information was public.

Market efficiency debates continue due to human behavior, challenges in risk adjustment, and difficulties in isolating relevant information from noise.
Short-term predictability is limited, and consistent, long-term excess returns are difficult to achieve.
The S&P 500 often serves as a practical benchmark; theoretical expected returns align with risk (e.g., $\beta = 1$ might expect ~15%).

Empirical evidence shows that consistently outperforming market indices like the Vanguard 500 is challenging for most professionally managed funds over long periods.
- Over a one-year window (1989-2021), funds beating the index occurred in only ~36% of years.
- Over a ten-year window (1998-2021), funds beating the index occurred in only ~45.8% of years.
This suggests that passive investing in broad market indices is often a more reliable and cost-effective strategy for many investors.

Insider trading laws are crucial for maintaining market trust and fairness.
Understanding market efficiency helps manage investment expectations, identify regulatory boundaries, and decide between active and passive investment strategies.
Regulatory compliance, risk management, and cost-effectiveness are central to sound investment decisions; long-run benefits often favor low-cost, diversified, passive approaches.