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091121_EMH - Efficient Markets Theory November 2009...

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Efficient Markets Theory Lecture 12 21 November 2009
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Efficiency: concept z Valuation efficiency Prices of securities traded on a market reflect their true fundamental values (P market = P fair ) z Informational efficiency Securities prices fully reflect all available information (P exp. = P fair ) z Allocative efficiency Market allocates productive resources to most productive investment opportunities Allocative efficiency = valuation eff. + informational eff.
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Informational efficient markets z EMH: Financial markets are efficient when security prices incorporate all available information z A market is said to be informationally efficient with respect to some information set if no agent can consistently make economic profit through the use of a trading rule based on that info set Economic profit = excess (abnormal) return Excess return = R i – E(R i ) > 0
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