Investments, tenth edition

    3.   Technical analysis focuses on stock price patterns and on proxies for buy or sell pressure in the 

market. Fundamental analysis focuses on the determinants of the underlying value of the firm, 

such as current profitability and growth prospects. Because both types of analysis are based on 

public information, neither should generate excess profits if markets are operating efficiently.  

    4.   Proponents of the efficient market hypothesis often advocate passive as opposed to active invest-

ment strategies. The policy of passive investors is to buy and hold a broad-based market index. 

They expend resources neither on market research nor on frequent purchase and sale of stocks. 

Passive strategies may be tailored to meet individual investor requirements.  

    5.   Event studies are used to evaluate the economic impact of events of interest, using abnormal 

stock returns. Such studies usually show that there is some leakage of inside information to some 

market participants before the public announcement date. Therefore, insiders do seem to be able 

to exploit their access to information to at least a limited extent.  

   SUMMARY 

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  C H A P T E R  

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  The Efficient Market Hypothesis 

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    6.   Empirical studies of technical analysis do not generally support the hypothesis that such analysis 

can generate superior trading profits. One notable exception to this conclusion is the apparent 

success of momentum-based strategies over intermediate-term horizons.  

    7.   Several anomalies regarding fundamental analysis have been uncovered. These include the P/E 

effect, the small-firm-in-January effect, the neglected-firm effect, post–earnings-announcement 

price drift, and the book-to-market effect. Whether these anomalies represent market inefficiency 

or poorly understood risk premiums is still a matter of debate.  

    8.   By and large, the performance record of professionally managed funds lends little credence to 

claims that most professionals can consistently beat the market.    

 Related Web sites 

for this chapter are 

available at   www.

mhhe.com/bkm   

   random  walk  

  efficient  market  hypothesis  

  weak-form  EMH  

  semistrong-form  EMH  

  strong-form  EMH  

  technical  analysis  

  resistance  levels  

  support  levels  

  fundamental  analysis  

  passive  investment  strategy  

  index  fund  

  event  study  

  abnormal  return  

  cumulative  abnormal  return  

  momentum  effect  

  reversal  effect  

  anomalies  

  P/E  effect  

  small-firm  effect  

  neglected-firm  effect  

  book-to-market  effect