Week 8_Equity Valuation - Introduction to Valuation...

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1 Introduction to Valuation Equities
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2 The Efficient Market Hypothesis In an informationally efficient capital market prices fully reflect all available information. To be efficient, market prices must adjust rapidly to the arrival of new information
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3 Forms of the EMH Weak form efficiency Semi-strong form efficiency Strong form efficiency Current prices reflect all Current prices reflect all past past security security - market information information Current prices reflect Current prices reflect all publicly available all publicly available information (past information (past prices, current fundamentals, expectations, etc.) prices, current fundamentals, expectations, etc.) Current prices reflect all information Current prices reflect all information -- -- public public and and private private
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4 Implications of EMH for financial analysis If markets are efficient, abnormal (above risk premium) returns cannot be earned from trading that is based on the information that determined those prices The information an analyst uses to identify mispriced securities will depend on what form of market efficiency s/he accepts
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5 Market Efficiency: A Paradox Is it possible to have a fully efficient market where all information is correctly reflected in price? What is the implication of full information efficiency? No research, no analysts, no MCom program Then how do prices incorporate new information? A balance between costs and benefits?
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