12. The efficient markets hypothesis The concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security such as a share of a particular corporation's common stock --should be the present value estimate of the firm's expected cash flows discounted by Rs appropriate rate of return (also called the intrinsic value of the stock). Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to beat the market the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Consider the following statement, and identify the form of capital market efficiency under the efficient market hypothesis based on this statement: Current market prices reflect all relevant information, whether it is known publicly or privately