Efficient Market Theory

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time stock and bond sales to take advantage of � insider� information, sales of stocks and bonds will not depress prices, and companies cannot �cook the books� to artificially manipulate stock and bond prices. However, information technology and market dynamics are based upon the workings of ordinary people and diverse organizations, neither of which are arguably efficient nor consistent. Therefore, we have the basic contradiction of EMT: How can a theory based on objective mechanical efficiency hold up when applied to subjective human inefficiency?

As a case in point, America Online (AOL) offers a classic example of how investors can be misled by a company that uses the market system against itself. AOL, up until early November of this year, used an accounting system that effectively �cooked their books� and provided misleading figures on the company' s performance. Instead of accounting for its promotion expenses and costs as a regular expense, as normal companies do, AOL ...

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the Newsweek article is that most normal companies do not use such accounting practices, however legal, to falsely report superior performance. EMT states: Fundamental analysis cannot produce investment recommendations that will enable an investor consistently to outperform a buy-and-hold strategy in managing a portfolio (Malkiel, 1990).

The corollary of the theory must also then be true. An investor cannot be hurt by the market because the stock value of a poor or overvalued performer already reflects that fact in its price. The available information would indicate to investors that certain stocks are overvalued and subject to rapid decline. The availability of public information did ...

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