Abstract The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ». Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series). Bachelier’s work get popular in the 60s during the computer’s era. In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data). In 1970, Fama published a review of the theory and empirical evidences The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time. Weak: Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns. Semi-strong: Not possible to earn superior profits using all information publicly available. Strong: Not possible to earn superior profit using all publicly and inside information. The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i): Re_i = Rf – Bi(Rm – Rf) With: Rf = Risk free rate (typically government bond rate) Rm = Expected return for the whole market Bi = The volatility risk of the security i compared to the whole market (Rm – Rf) is consequently the market risk premium According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm Investors want to value companies before making investment decisions. A typical way to do so is to use the Discounted Cash Flow (DCF) method: See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.