Efficient Market Hypothesis
Prices already reflect available information.
What is Efficient Market Hypothesis?
In weak form, past prices are already priced in (technical analysis fails); semi-strong adds all public information (fundamental analysis fails); strong form adds private information. The practical takeaway is the case for low-cost indexing.
Efficient Market Hypothesis: a worked example
Earnings news is reflected in the price within seconds, long before a retail investor can act.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
Total Return
Price change plus income, as a single return figure.