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115 CFA
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115.060.03.01 Equity Investments - Reading 38 - 1. The Concept of Market Efficiency

1. The Concept of Market Efficiency

a. describe market efficiency and related concepts, including their importance to investment practitioners;

b. distinguish between market value and intrinsic value;

c. explain factors that affect a market's efficiency;

What is an efficient capital market? (Also called a informationally efficient capital market)?
An efficient capital market is one in which security prices adjust rapidly to the arrival of new information and the current prices of securities reflect all information about the securities.

What is market value versus intrinsic value?
- Intrinsic value is the true, actual value of an asset. It is what the asset is really worth.
- Market value is the price of an asset. It is what buyers are willing to pay for the asset.

What are three factors that affect a market's efficiency?
1. The number of market participants - the more investors and analysts that follow a financial market, the more efficient it becomes.
2. Information availability and financial disclosure - all investors should have access to the necessary information to value securities.
3. Limits to trading - some researchers argue that restrictions on short selling impede market efficiency.


Source:
  • CFA