Efficient-market hypothesis

The efficient-market hypothesis holds that asset prices rapidly incorporate available information, making persistent risk-adjusted outperformance difficult without access to new information or bearing additional risk.

Weak-form efficiency: The claim that asset prices reflect information contained in past prices and trading data. It predicts that chart patterns and historical-price rules cannot reliably produce excess returns.
Louis Bachelier: A French mathematician whose 1900 thesis modeled speculative prices as random processes. His early mathematical treatment anticipated later claims that price movements resist prediction.
Index fund: A mutual fund or exchange-traded fund designed to track a market index. If outperforming the market is difficult, broad low-cost index exposure becomes a practical alternative.
Behavioral finance: A field studying how psychological biases and social influences shape financial decisions and markets. It explains persistent price distortions through systematic departures from fully rational investor behavior.
Modern portfolio theory: A framework for choosing portfolios by balancing expected return against risk through diversification. Efficiency complements its focus on diversified exposure rather than forecasting individual securities.
Semistrong-form efficiency: The claim that asset prices reflect all publicly available information. It extends the efficiency claim from trading history to public announcements and financial reports.
Eugene Fama: An American economist whose research formalized and tested the efficient-market hypothesis. His 1970 review established the influential classification of market efficiency into three forms.
Passive management: An investment approach that tracks a benchmark rather than selecting securities to outperform it. It follows from the view that active attempts to exploit public information rarely justify their costs.
Market anomaly: A recurring empirical pattern in asset returns that standard models do not readily explain. Anomalies challenge efficiency when they persist after accounting for risk, data selection, and trading costs.
Information asymmetry: A condition in which parties to a transaction possess unequal information. The strong-form claim raises the question of whether prices can incorporate information unavailable to ordinary investors.

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