Efficient Market Theory and Modern Portfolio Theory
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Efficient Market Theory and Modern Portfolio Theory
Efficient Market Theory
Burton Malkiel's A Random Walk Down Wall Street, first published in 1973, popularized this theory, which says that stock prices reflect all the publicly available information about the companies. Stock prices may not be "right," but they're as correct as they possibly can be.
Things To Know
- Both of these theories guide a lot of investment thinking.
There's no point in trying to beat the market, suggests the theory. Just index it.
Some, including most mutual fund managers, disagree. They feel that they can find mispriced securities, or opportunities where a stock's price does not accurately reflect everything about the company.
Modern Portfolio Theory
Just call Harry Markowitz the Dean of Diversification. Back in the 1950s, Markowitz pointed out what is now obvious: The more return you can expect from an investment, the greater the risk inherent in that investment. Modern Portfolio Theory says that you can limit your volatility by spreading your risk among different types of investments.