Lesson 4 of 7 · 13 min
Implications for analysis and portfolio management
If developed markets are weak-form and semi-strong-form efficient, technical analysis cannot earn consistent abnormal returns, fundamental analysis pays only with a genuine comparative advantage, passive management should beat active management after costs, and the portfolio manager's job becomes building the right portfolio rather than beating the market.
In short
- Weak-form efficiency → no abnormal returns from past price trends (technical analysis).
- Semi-strong efficiency → analysts must ask whether information is already in the price and how genuinely new information changes value.
- Markets are not strong-form efficient, because securities laws are designed to stop the exploitation of private information.
- Fundamental analysis keeps markets semi-strong efficient by spreading value-relevant information; it can still pay if the analyst has a comparative advantage.
- Technical analysts keep markets weak-form efficient: profitable patterns get detected and arbitraged away.
- Mutual funds on average match the market before fees and lag it after fees, so passive management should outperform; the manager's role is to fit the portfolio to the client's objectives, risk, diversification and tax needs.
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