<html><body><div style="color:#000; background-color:#fff; font-family:times new roman, new york, times, serif;font-size:12pt"><div style="font-family: 'times new roman', 'new york', times, serif; font-size: 12pt;">Hi Mirco, </div><div style="font-family: 'times new roman', 'new york', times, serif; font-size: 12pt;"><br></div><div style="font-family: 'times new roman', 'new york', times, serif;"><div style="font-family: 'times new roman', 'new york', times, serif;"><div class="y_msg_container" style="font-family: 'times new roman', 'new york', times, serif; font-size: 12pt;"><span style="font-size: 12pt;">> The EMH is about relative efficiency: the market is more efficient</span><br></div><div class="y_msg_container"><span style="font-size: 12pt;">> compared with other not free solutions. And this happen because the</span><br><span style="font-size: 12pt;">> actors are free willed and not rule bounded re-actors.</span><br><br><span
style="font-size: 12pt;">EMH is the idea that the market processes public information quickly and efficiently in such a way that the current market price of an asset, adjusted for risk and the time value of money, is the best estimate of the future price. It is related closely to the Capital Asset Pricing Model (CAPM).</span></div><div class="y_msg_container"><br></div><div class="y_msg_container">Let us say I have a piece of paper that I personally guarantee will be worth 100 USD in one year. I want you to buy it, and I promise to buy it back in one year for 100 USD. What is my piece of paper worth to you today? What is a fair price for both you the buyer and me the seller? To answer that question, we must first adjust for interest. For purposes of CAPM, loans to the US government are considered risk-free. Let us say the risk-free rate on one year notes issued by the US government is 2%. This means my piece of my paper cannot be worth more than
approximately 98 USD to you, because you could put that money to work without risk and earn 2%. We must then also consider your risk. How good is my guarantee? As it turns out, my guarantee is not very good compared to that of the US government, so we must discount this piece of paper even more. Perhaps it is worth 90 USD to you, giving you an expected return of about 11%</div><div class="y_msg_container"> </div><div class="y_msg_container">Applying this kind of CAPM thinking to stocks, and using their relative volatility (beta) as a measure of risk, leads to the hypothesis that if CAPM applies to the stockmarket and if the prices efficiently reflect public information, the current price of a stock adjusted for risk and interest is the best prediction of its future price. That is the Efficient Market Hypothesis.</div><div class="y_msg_container"><br></div><div class="y_msg_container">Evidence in favor of EMH is pretty compelling, but as I
mentioned there are some anomalies.</div><div class="y_msg_container"><br></div><div class="y_msg_container">PS. I am now a proud owner of bitcoins. The price went up and so far I am profitable. I invested about half my allotted funds, currently sitting at Mt.Gox. If the price drops, I'll buy more. It seems to be dropping rather quickly as I type this.</div><div class="y_msg_container"><br></div><div class="y_msg_container">-Gordon</div> </div> </div> </div></body></html>