EMH%20DQ

EMH%20DQ - Session 12: Efficient Market Hypothesis A. If...

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Unformatted text preview: Session 12: Efficient Market Hypothesis A. If you use the free charting service, your trading strategies are based on historical price and volume data only. Hence you believe the share price has not fully reflected such information and you can make money out of it. Your action is against the belief that the market is weak form efficient. B. If the research team bases its recommendations on fundamental analysis which uses publicly available information, you believe the share price has not fully reflected such information and you can make money out of it. Hence your action is against the belief that the market is semi-strong form efficient. On the other hand, your action may be explained by your belief that the market is semi-strong from efficient and the research team has access to information not known to the general public. Hence you can make money by following the recommendations. However, you have to work out whether your return net of transaction costs is abnormal. C. If you pass on your insider information to anyone on the belief that he/she will exploit the information through trading, you believe that the share price has not fully reflected such information and one can make money out of it. Hence your action is against the belief that the market is strong form efficient. Please be warned that trading on inside information is unethical and is against the law! D. Yes. A semi-strong form efficient market implies that traders cannot use any publicly available information to earn abnormal returns. If the market is not weak form efficient, then traders can use historic price and volume information to earn abnormal returns. Since historic price and volume data are publicly available information, the market is not semi-strong form efficient. E. No. A weak form efficient market implies that traders cannot use historical price and volume data to earn abnormal returns. If the market is not semi-strong form efficient, then traders can use publicly available information to earn abnormal returns. Although historic price and volume data is classified as publicly available information, there are other types of publicly available information such as published macro-economic data. Therefore, it is possible that market is weak form efficient, but not semi-strong form efficient. F. Anomaly Post earnings announcement drift Observation Companies with larger (smaller) than expected earnings announcements are found to Implication It is not feasible to implement this effect into portfolio construction at a single point in 1 P/E effect Size effect experience positive (negative) abnormal returns after the announcements Low P/E ratio stocks tend to outperform high P/E ratio stocks. This effect holds even after controlling for firm size and risk, i.e., low P/E ratio stocks in each firm size (risk) category tend to outperform high P/E ratio stocks in the same category. Small firms tends to outperform large firms time because the earnings announcements are made throughout the year. Collect P/E ratios for the stocks. Sort the stocks according to P/E ratio. Ensure that only stocks with low P/E ratios have positive weights. Collect market capitalization for the stocks. Sort the stocks according to market cap. Ensure that only stocks with small market cap have positive weights. 2 ...
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