Efficient Market Hypothesis
Financial term in the Investing category
Definition
A theory stating that asset prices fully reflect all available information, making it impossible to consistently outperform the market through stock picking or market timing. This hypothesis is the theoretical foundation for passive investing strategies.
Related Terms
Modern Portfolio Theory
A framework developed by Harry Markowitz that shows how investors can construct portfolios to maximize expected return for a given level of risk through diversification. The theory demonstrates that portfolio risk depends not just on individual assets but on how they correlate.
Passive Investing
An investment strategy that aims to match market returns rather than beat them, typically through index funds and ETFs. Passive investing relies on broad diversification and low costs, and research shows it outperforms most active managers over long periods.
Index Fund
A type of mutual fund or ETF designed to track the performance of a specific market index, like the S&P 500. Known for low fees and passive management strategy.
Frequently Asked Questions
What is Efficient Market Hypothesis?
A theory stating that asset prices fully reflect all available information, making it impossible to consistently outperform the market through stock picking or market timing. This hypothesis is the theoretical foundation for passive investing strategies.
Why is Efficient Market Hypothesis important in personal finance?
Efficient Market Hypothesis is an important investing concept that helps individuals make better financial decisions. Understanding Efficient Market Hypothesis can improve your financial planning and help you achieve your money goals.
How does Efficient Market Hypothesis relate to Modern Portfolio Theory?
Efficient Market Hypothesis and Modern Portfolio Theory are related financial concepts. A framework developed by Harry Markowitz that shows how investors can construct portfolios to maximize expected return for a given level of risk through diversification. The theory demonstrates that portfolio risk depends not just on individual assets but on how they correlate.
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