Discuss implications of the efficient market hypothesis for the allocation of funds.


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The efficient market hypothesis (EMH) has numerous applications to the real world. It is especially valuable because it can be applied directly to an issue that concerns managers of financial institutions and general public as well.

Question: What is the efficient market hypothesis? discuss in brief the important evidence in favor and in against the market efficiency (5 points). Also answer the following questions.

  1. Suppose that you have just read in a reputed journal that investment advisors are predicting a boom in oil stocks because an oil shortage is developing. Should you proceed to withdraw all your hard-earned savings from the bank and invest it in oil stock? Explain your action. (1 point)
  1. Suppose that your broker phones you with a hot tip to buy stock in the Ahmed Feet corporation (AFC) because it has just developed a product that is completely effective in curing athlete’s foot. The stock price is sure to go up. Should you follow this advice and buy AFC stock? Explain your action. (1 point)
  1. Do Stock Prices always rise when there is good news? Discuss. (1 point)
  1. Prepare a practical guideline for small investors who want to invest in the stock market, the guideline should provide a better understanding of the use and implications of the efficient market hypothesis. (2 points)
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