Chapter 11&12 (slides)

Chapter 11&12 (slides) - 11-1THE EFFICIENT MARKET...

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Unformatted text preview: 11-1THE EFFICIENT MARKET HYPOTHESISCHAPTER 1111-2Outline of the Chapter•What is the Efficient Market Hypothesis?•Versions of the EMH•Methods employed to identify underpriced securities•Event studies•Empirical Tests of EMH– Weak-form– Semistrong-form•Mutual fund and analyst performance11-3Random Walks and the Efficient Market Hypothesis•Efficient Market Hypothesis (EMH): stock prices already reflect all the available information– Stock prices should follow a random walk– Price changes should be random and unpredictable11-4Random Walks and the Efficient Market Hypothesis (Continued)•Stock prices fully and accurately reflect publicly available information.•Once information becomes available, market participants analyze it.•Competition assures prices reflect information.•Degree of efficiency differs across various markets.– Emerging markets, and small stocks are less intensively analysed so the stocks in emerging markets and the small stocks may be less efficiently priced.11-5•There are three forms of efficiency which differ by their notions of what is meant by the term “ all available information”.– Weak-form efficiency indicates that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices and trading volume.• In a weak-form efficient markets if historical data such as past prices conveys an information related to the future it has to be known by the all investors and caused an immediate change in the stock prices.Random Walks and the Efficient Market Hypothesis (Continued)11-6Random Walks and the Efficient Market Hypothesis (Continued)– Semistrong-form efficiency indicates that all publicly available information regarding the prospects of a firm must be already reflected in the stock price.• Information includes past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earning forecasts, and accounting practices.– Strong-form efficiency states that stock prices reflect all information relevant to the firm, even including information available only to company insiders.11-7Random Walks and the Efficient Market Hypothesis (Continued)•If an investor earns abnormal returns by using historical data then the market is _______•If an investor earns abnormal returns by using publicly available information then the market is_________.•If an investor earns abnormal returns by using private information (inside information) then the market is ____________.11-8Implications of the EMH•Technical Analysis:– Search for repeating and predictable patterns in stock prices.– Technical analysts study records or charts of past stock prices to find patterns they can exploit to make profit....
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Chapter 11&12 (slides) - 11-1THE EFFICIENT MARKET...

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