Types of efficiency-efficient market hypothesis , Financial Management

Assignment Help:

Types of Efficiency   

Efficient market theory can be described in three ways:

1) Allocative Efficiency:
A market is allocatively proficient when it directs savings towards the most proficient productive enterprise or project. In this condition, the most proficient enterprises will find it simpler to increase funds and economic prosperity for the entire economy should outcome.

Allocative effectiveness will be at its optimal level when there is no alternative allotment of funds channelled from savings which would outcome in higher economic prosperity. To be allocatively proficient, the market must have fewer financial intermediaries such that funds are allocated directly from savers to users, hence financial disintermediation must be encouraged.

2) Operational Efficiency:
This concept associates to the cost, to the borrower and lender, of doing business in a specific market.  The greater the transaction cost, the greater the cost of employing financial market and hence the lower the operational efficiency. Transaction cost is kept as low as possible where there is open competition between broker and other market participants. For a market to be operationally proficient, hence, we require to have adequate market markers who are capable to play continuously.

3) Information Efficiency:
This reflects the extent to which the information concerning the future prospect of a security is reflected in its present price. When all known (public information) is reflected in the security price, then investing in securities becomes a fair game. All investors have similar chances mainly since all the information which can be identified is already reflected in share prices. Information effectiveness is significant in financial management since it means that the effect of management decision will rapidly and accurately be reflected in security prices. Efficient market theory associates to information processing efficiency. It argues that stock markets are proficient such that information is reflected in share prices precisely and quickly.


Related Discussions:- Types of efficiency-efficient market hypothesis

Differentiate between systematic and unsystematic risk, QUESTION a) Dis...

QUESTION a) Discuss the importance of diversification in the context of stock markets using appropriate numerical illustrations. b) Mimine and Minush are two companies with

Modified duration versus effective duration, Modified duration is use...

Modified duration is used to determine the percentage change in the bond's prices for a 100 basis point (1%) change in the yield. The underlying assumption is tha

Define the modigliani and miller theory of dividends, What is the Modiglian...

What is the Modigliani and Miller theory of dividends?  Explain. The Modigliani-Miller theory of dividends states that dividend theory is not relevant.  They state that it is the

Perfectly competitive market, What level of profits can you earn in a perfe...

What level of profits can you earn in a perfectly competitive market and what drives markets towards perfect competition over the long run?

Federal reserve board, Federal Reserve Board The Federal Reserve Board ...

Federal Reserve Board The Federal Reserve Board controls the nation's monetary policy, regulates banks, and searches to keep the financial stability of the United States. Its t

Trading Options, TRADING IN OPTIONS We have already seen that options a...

TRADING IN OPTIONS We have already seen that options are traded on exchanges and have already discussed how to understand published quotations. Let us now learn the trading mec

Define the safety and soundness implications of mergers, Define the safety ...

Define the safety and soundness implications of mergers? A: No. All mergers need regulatory approval and are subject to intense examination through regulators. If anything, the r

Principles of good regulation, Principles of Good Regulation While perf...

Principles of Good Regulation While performing its functions, the FSA needs to take into account certain matters which are termed the ‘principles of good regulation'. The matte

How to measure the firm risk of a capital budgeting project, Explain how to...

Explain how to measure the firm risk of a capital budgeting project. The firm risk of a capital budgeting project measures the force of adding a new project to the existing pro

Valuation models, V aluation Models A valuation model defines the e...

V aluation Models A valuation model defines the exercise of applying financial and economic principles to estimate the value of an asset. Discounted cash flow valuation mod

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd