An informationally efficient market (an efficient market) is a market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information.
Investment managers and analysts, as noted, are interested in market efficiency because the extent to which a market is efficient affects how many profitable trading opportunities (market inefficiencies) exist. Consistent, superior, risk-adjusted returns (net of all expenses) are not achievable in an efficient market.
In an efficient market, a passive investment strategy (i.e., buying and holding a broad market portfolio) that does not seek superior risk-adjusted returns can be preferred to an active investment strategy because of lower cost.
By contrast, in a very inefficient market, opportunities may exist for an active investment strategy to achieve superior risk-adjusted returns (net of all expenses in executing the strategy) as compared with a passive investment strategy. In inefficient markets, an active investment strategy may outperform a passive investment strategy on a risk-adjusted basis. Understanding the characteristics of an efficient market and being able to evaluate the efficiency of a particular market are important topics for investment analysts and portfolio managers.
Market Value versus Intrinsic Value
Market value is the price at which an asset can currently be bought or sold.
Intrinsic value (sometimes called fundamental value) is, broadly specking, the value that would be placed on it by investors if thery had a complete understanding of the asset’s investment characteristics.
