Markets efficient efficient markets are a result of

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Unformatted text preview: portion of announcements announcements The easier it is to trade on surprises, the The more efficient markets should be more Efficient markets involve random price Efficient changes because we cannot predict surprises surprises Systematic Risk Systematic Risk factors that affect a large number of Risk assets assets Also known as non-diversifiable risk or Also market risk market Includes such things as changes in GDP, Includes inflation, interest rates, etc. inflation, Unsystematic Risk Unsystematic Risk factors that affect a limited number of Risk assets assets Also known as unique risk and assetspecific risk Includes such things as labor strikes, part Includes shortages, etc. shortages, Returns Returns Total Return = expected return + unexpected Total return return Unexpected return = systematic portion + Unexpected unsystematic portion unsystematic Therefore, total return can be expressed as Therefore, follows: follows: Total Return = expected return + systematic Total portion + unsystematic portion portion Diversification Diversification Portfolio diversification is the investment in Portfolio several different asset classes or sectors several Diversification is not just holding a lot of assets For example, if you own 50 Internet stocks, you For are not diversified are However, if you own 50 stocks that span 20 However, different industries, then you are diversified different Table 13.7 Table The Principle of Diversification The Diversification can substantially reduce the Diversification variability of retur...
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This note was uploaded on 04/13/2010 for the course BUSINESS engl 102 taught by Professor Seyhanözmenek during the Spring '10 term at Middle East Technical University.

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