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Free Example of An Efficient Market Hypothesis Essay

Efficient market hypothesis states that it is highly unlikely to make profits higher than what market offers as stock prices gradually tend to incorporate all the relevant market information. The stock prices evince all the significant information which precludes the possibility of making arbitrage profits (risk adjusted profits) and stock prices reflect its true inherent value.

No stock available on the market is highly likely to yield 100% safe returns for a longer time period as gradually stock prices tends to incorporate all the relevant information available. Hence, it is futile to predict future stock market prices and make transactions accordingly. However, it can coincidently offer higher returns that can be aptly termed as ‘gambling’, which has the possibility to yield higher returns.

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When purchasing any stock available, it is important for investors to make sure that all the possible information is out there with them, so that they have good chances of safe return but it is not possible to cover contingencies for that longer time period or incorporate all the intricate transactions taking place that can guarantee us the safe returns without any possibility of incurring risk. Our stock market transactions are well calculated incorporating the level of risk present in it. And with it the higher the risk, higher will be return in it.

There are certain elements that can vanquish the efficient market theory if there is weak efficient market where prices reflect past and limited information. There are some anomalies present in stock market where some incumbent have made huge profits, or low valued stocks producing greater returns and vice versa in this industry nullifying the efficient market hypothesis, however, stock market is subject to bit of irregularities because of limited rationality as human mind cannot always make perfect calculations and attach exact value to the stocks.

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