Efficient Market Hypothesis (EMH) Quiz

Study Notes

States that financial markets reflect all available information at any given time
Three forms:
1. Weak EMH: Past stock prices and returns are reflected in current prices
2. Semi-Strong EMH: All publicly available information is reflected in current prices
3. Strong EMH: All information, public or private, is reflected in current prices
Implications:
- It is impossible to consistently achieve returns in excess of the market's average
- Technical analysis and fundamental analysis are useless in achieving excess returns
- Diversification is the best way to minimize risk

Analyzes investor attitudes and emotions to gauge market direction
Based on the idea that market prices are influenced by investor psychology
Types of sentiment analysis:
- Bullish: Investors are optimistic about the market
- Bearish: Investors are pessimistic about the market
Tools used:
- Put-call ratio: Ratio of put options to call options traded
- VIX index: Measures market volatility and fear
- Sentiment surveys: Surveys of investors to gauge their attitudes
Limitations:
- Sentiment analysis is not always accurate
- Can be influenced by various biases and emotions

Involves going against the majority opinion or sentiment
Based on the idea that the majority is often wrong
Strategies:
- Buying during market downturns: When sentiment is bearish
- Selling during market upswings: When sentiment is bullish
Advantages:
- Can lead to buying low and selling high
- Can provide a contrarian hedge against popular opinions
Limitations:
- Requires discipline and patience
- Can be difficult to go against the crowd

Financial markets reflect all available information at any given time
Three forms of EMH: • Weak EMH: Past stock prices and returns are reflected in current prices • Semi-Strong EMH: All publicly available information is reflected in current prices • Strong EMH: All information, public or private, is reflected in current prices
Implications of EMH: • Impossible to consistently achieve returns in excess of the market's average • Technical analysis and fundamental analysis are useless in achieving excess returns • Diversification is the best way to minimize risk

Analyzes investor attitudes and emotions to gauge market direction
Based on the idea that market prices are influenced by investor psychology
Types of sentiment analysis: • Bullish: Investors are optimistic about the market • Bearish: Investors are pessimistic about the market
Tools used in sentiment analysis: • Put-call ratio: Ratio of put options to call options traded • VIX index: Measures market volatility and fear • Sentiment surveys: Surveys of investors to gauge their attitudes
Limitations of sentiment analysis: • Not always accurate • Can be influenced by various biases and emotions

Involves going against the majority opinion or sentiment
Based on the idea that the majority is often wrong
Strategies of contrarian investing: • Buying during market downturns: When sentiment is bearish • Selling during market upswings: When sentiment is bullish
Advantages of contrarian investing: • Can lead to buying low and selling high • Can provide a contrarian hedge against popular opinions
Limitations of contrarian investing: • Requires discipline and patience • Can be difficult to go against the crowd