Lecture #16 - Ec 136, Financial Economics Lecture 16...

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Ec 136, Financial Economics Lecture 16 October 27
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Outline for today 1. Expectations and EMH 2. EMH critiques: size and value 3. Asset allocation www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings: BKM Chapters 6, 7, 8.1-8.2 (6 and 7.1, 7.2 Problem set 5 : due October 29, Thurs, in class.
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1. Expectations and EMH P T in period T . Focus on special case : R = 0 and no dividends P t = E t P T and similarly P t +1 = E t +1 P T : By Law of Iterated Expectations P t = E t P T = E t E t +1 P T = E t P t +1 asset price equals expectation of own future value. Therefore E t [ P t +1 ± P t ] = E t [ P t +1 ] ± E t P t = E t [ P t +1 ] ± P t = 0 : Price changes caused only by new info and are unpredictable (their rational expectation is zero). { Random walk model of stock prices.
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What happens in general case: R > 0 and with dividends? Now prices also move when investors earn \nor- mal return": compensation for risk and time If return is
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This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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Lecture #16 - Ec 136, Financial Economics Lecture 16...

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