What did Sir Kendall find when analyzing day to day movement of stock prices?
Each price series appeared to be "a wandering one, almost as if once a week the Demon of Chance drew a random number and added it to the current price to determine the next week's price
Essence of a Random Walk
The movement of stock prices from day to day does not reflect any pattern
What does market efficiency say about stock price movement?
Developed financial markets are competitive, with lots of smart investors trying to profit. Profit seeking leads to prices adjusting immediately until superior profits from studying past price movements disappear
Does EMT say the market is always right?
No, it says that it is difficult to cosistently and profitably predict how the market is wrong.
Does EMT say you cannot get lucky?
No, millions of investors, some are bound to get lucky for a while
What does EMT say about high returns?
- It's easy to earn high expected returns, by taking on enough risk
- You need to compare with a return on a benchmark portfolio with similar risk