Efficient Market Hypothesis and behavioral Finance Homework Help

Case Study: Efficient Market Hypothesis and behavioral Finance – Is a            Compromise in Sight by Nikolai Chuvakhin

Situation:

The question of the correlation of the security prices is something that has occupied the minds of the investors and experts in this field for a long time. At the center of this debate as been whether the probability of the prices of the securities to move up or down are equal, and whether they follow a random path.  It is in an effort to understand this concerns that the efficient market hypothesis was broached.

Hypothesis:

In this hypothesis Eugene Fama visualizes a situation similar to a perfectly competitive market in microeconomic where each and every seller earns profits just enough to sustain him in the market but inadequate to attract new competitors, the so called normal profits.  If we assume that this can also apply in the stock market, then it follows that new information that become available will be quickly reflected in the stock prices, in the absence of which abnormal returns will be evident.

In this case study the efficient market hypothesis gets inside the crosshair. In this regard we have the assumption of the correlation of stock prices, which is at the heart of this hypothesis.

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