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Well done Emanual Derman. At last someone is asking the right questions. I broke EMH, Portfolio Risk/Diversification and CAPM in my1995 University College Dublin 500-page Master’s thesis. I showed that,
1. Markets are only as efficient as the data reported.
2. Portfolios do not fully diversify away unsystematic risk.
3. CAPM is only valid within a 90-day range.

I published my thesis in 2002 as a 278-page book, titled “A Rational Approach to Unsystematic Risk, Re-Thinking Modern Finance” . You can still purchase it from http://www.quantumrisk.com/books.html while stocks lasts.

I too had a quick look at Andrew Lo’s AMH. It could be a good approach. However, being an engineer by training, I’m not keen to rush into more theory. In 1995 I had proposed how we could measure market efficiency (see table below). While I am not a whole hearted fan of EMH, I believe we should use metrics to measure market efficiency to monitor and improve markets. My 1995 results suggest that market volatility plays a part in market efficiency.

Stock Exchange Index Prob. of
Weak Form
Prob. of
Strong Form
Bangkok SET Index 100.00% 81.59%
Frankfurt DAX 87.29% 77.42%
Gold Gold Spot 100.00% 94.18%
Hong Kong Hang Seng 100.00% 90.49%
Kuala Lumpur Composite 83.40% 76.09%
Kuala Lumpur Emas 81.46% 66.15%
London FTSE 81.33% 71.33%
New York Dow Jones 84.13% 59.05%
New York S&P 500 84.20% 80.68%
Singapore All Share 76.26% 74.83%
Sydney All Share 100.00% 98.87%
Tokyo Nikkei 82.64% 76.79%

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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