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

What is public finance, What is Public Finance Central, state as well...

What is Public Finance Central, state as well as local governments handle large sums ofmoney, which are received from several sources and should be utilized in accordancewith

What are a bank''s primary reserves, What are a bank's primary reserves ? ...

What are a bank's primary reserves ? When the Fed sets reserve requirements, what is its primary goal? Vault deposits and cash in the bank's account at the Fed are used to pe

State what is average cost, State what is Average cost Average cost rep...

State what is Average cost Average cost represents weighted average of the costs of each source of fundsemployed by enterprise, weights being the relative share of each source

Yield to put, Yield to put is the rate at which the present val...

Yield to put is the rate at which the present value of cash flow to the first put date is equal to the price plus interest rate. It is used for

Definition of financial leverage, Q. Definition of financial leverage? ...

Q. Definition of financial leverage? One of the goals of planning an appropriate capital structure is to maximize the return on equity shareholders fund or else maximize the ea

Directional strategies--investment strategy of hedge funds, Directional Str...

Directional Strategies : Strategies in this category involve buying or/and selling securities or financial instruments that the markets believe to be significantly overpriced or un

Financial systems, Financial Systems: The overall financial management ...

Financial Systems: The overall financial management framework will include a number of elements such as: Financial systems designed to capture the details of each financ

What is alternative minimum tax, Q. What is Alternative Minimum Tax? Al...

Q. What is Alternative Minimum Tax? Alternative Minimum Tax (AMT) - Tax imposed to back up the regular income tax imposed onCORPORATION and individuals to guarantee that taxpay

Dividend policy, #questThe managing directors of three profitable listed co...

#questThe managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends

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?

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