Efficient Market Hypothesis
InvestingGlossary term
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 TheoryA 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 InvestingAn 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 FundA 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.
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