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14-6a.- Efficient Markets

14-6a.- Efficient Markets - Efficient Capital Markets...

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Ramesh Rao 1 FEx06 Efficient Capital Markets
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Ramesh Rao 2 FEx06 Organization 1. Meaning, Significance, and Broad Implications 2. Types of Market Efficiency 3. Evidence and Conclusions
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Ramesh Rao 3 FEx06 1. Meaning and Significance Meaning? Significance?
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Ramesh Rao 4 FEx06 The EMH and its Implications The Efficient Market Hypothesis (EMH): “Stock Prices Fully Reflect Available Information” Implications: “Investors can only expect to obtain normal rates of return” Firms should expect fair value for its securities
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Ramesh Rao 5 FEx06 2. Types of Market Efficiency Weak Form: “Security prices fully incorporate information in past stock prices” P t = P t-1 + Expected Return + Random Error Stock prices follow a random walk Implication: Security prices cannot be estimated through “ technical analysis”
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Ramesh Rao 6 FEx06 Other Forms of Efficiency “Semi-strong Form” “Security prices incorporate all publicly available information,” -the meaning of “fundamental analysis” “Strong Form” “Prices reflect all information, both public and private”
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