Efficiency: conceptzValuation efficiency–Prices of securities traded on a market reflect their true fundamental values (Pmarket= Pfair)zInformational efficiency–Securities prices fully reflect all available information (Pexp.= Pfair)zAllocative efficiency–Market allocates productive resources to most productive investment opportunities–Allocative efficiency = valuation eff. + informational eff.
Informational efficient marketszEMH:–Financial markets are efficient when security prices incorporate all available informationzA market is said to be informationally efficient with respect to some information set if no agent can consistentlymake economic profit through the use of a trading rule based on that info set–Economic profit = excess (abnormal) return–Excess return = Ri– E(Ri) > 0
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