Weak Form Efficiency
What is Weak Form Efficiency?
How Does Weak Form Efficiency Work?
The central idea behind weak-form efficiency is that the randomness of stock prices are independent of each other, meaning that price "momentum" does not generally exist and past growth does not predict future growth. Malkiel argues that people often believe events are correlated if the events come in "clusters and streaks," even though "streaks" occur in random data such as coin tosses.prices renders attempts to find price patterns or take advantage of new information futile. In particular, the theory claims that day-to-day
In turn, the theory also considers technical analysis undependable because stock prices already reflect all information. Malkiel also finds fundamental analysis flawed because analysts often collect bad or useless information and then poorly or incorrectly interpret that information when predicting stock values. Factors outside of a company or its industry may affect a stock price, rendering further the fundamental analysis irrelevant.
Why Does Weak Form Efficiency Matter?
The analysts and professional advisors add little or no value to portfolios, especially mutual fund managers (with the notable exception of those managing that take on greater risks), and that professionally managed portfolios do not consistently outperform randomly selected portfolios with equivalent risk characteristics. As Malkiel it, " advisory services, predictions, and complicated chart patterns are useless....Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts."essentially proclaims that it is impossible to consistently outperform the , particularly in the short term, because it is impossible to predict prices. This may be controversial, but by far the most controversial aspect of the theory is its claim that
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