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chapter 5 notes
Course: BUS 320, Fall 2007School: N.C. State
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BUS 320 Chapter 5 Notes 1 Financial Managers Do not operate in a vacuum. Make decisions within large complex environment. It is crucial that they have a good understanding of this environment. 2 Well Functioning Economy Capital must flow efficiently from those who have excess capital to those in need of capital. Globally, economic development is highly correlated with the level & efficiency of...
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BUS 320 Chapter 5 Notes 1 Financial Managers Do not operate in a vacuum. Make decisions within large complex environment. It is crucial that they have a good understanding of this environment. 2 Well Functioning Economy Capital must flow efficiently from those who have excess capital to those in need of capital. Globally, economic development is highly correlated with the level & efficiency of financial markets and institutions. 3 Types of Financial Markets Money vs. Capital Markets Money involve capital with maturies of 12 months or less Capital involve capital with maturies of more than 12 months. Primary vs Secondary Markets Primary-Deals with new issues Secondary-deals with previously issued securities. 4 Stock Market Efficiency Efficient Markets Hypothesis Stocks are always in equilibrium. It is impossible for an investor to consistently beat the market. Prices adjust almost immediately to any new development or relevant information as it becomes available. Market Efficiency does not imply that all stocks are always priced correctly some may overvalued and some may be undervalued. 5 Levels of Market Efficiency Weak-Form Efficiency Semi-Strong Form Efficiency Strong Form Efficiency 6 Weak-Form Efficiency All information contained in past stock price movements is fully reflected in <a href="/keyword/current-market-price/" >current market price</a> s Trends (recent) in stocks prices would be of no use in selecting stocks. Technical analysis is does not work If patterns in prices truly existed wouldn't other investors also discover it? Implies that any information that comes from an examination of past stock prices cannot be used to make money by predicting future stock prices. 7 Semi-Strong Form Efficiency <a href="/keyword/current-market-price/" >current market price</a> s reflect all publically available information. It would do not good to poor over annual reports, research reports etc. because market prices would adjust immediately to this information. Can expect above average returns only with good luck or information that is not publicly available. Stock prices will adjust only if released information differs from what was expected. 8 Strong-Form Efficiency <a href="/keyword/current-market-price/" >current market price</a> s reflect all pertinent information (publicly available or non public information) If this is true even insiders would find it impossible to earn abnormally high returns. 9 Are the Markets Efficient? Most researchers believe that markets are generally efficient in the long run. 10
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