One goal of government policy is to encourage the establishment of allocationally efficient markets in which the firms with the most promising investment opportunities have access to the needed funds. However, in order for markets to be allocationally efficient, they need to both internally and externally efficient.
Even if the market is efficient, there exists a role for portfolio managers
Find an optimal portfolio on the efficient frontier
Two-fund separation theorem
1 2
+20
+30
+10
+20
+30
3.
4.
5.
Will it be possible to beat the market consistently over time? Empirical evidence is mixed
In efficient markets, technical trading rules should not work since all of the past information is contained in current prices Evidence of overreaction or under reaction to information, etc.
Stronger assumption than the EMH Expected price is increasing over time Positive trend and random about the trend
An internally efficient market is one in which brokers and dealer compete fairly, making the cost of transacting low and the speed of transacting high.