MGMT310_lecture13_updated

MGMT310_lecture13_updated - Review ReviewQuestions 1....

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eview Questions Review Questions 1. Suppose that between yesterday and today, the expected return on Stock X suddenly increases. What happens to the actual/realized return?
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ore on expected ctual returns More on expected vs actual returns Expected return tells you what your average realized returns should equal over a long period of time However, expected return does not tell you what will your tl t b f i it i ti actual return be for any given point in time Can write as: expected turn unexpected turn r i,t = expected return i,t + unexpected return i,t Thus, you cannot predict future returns if markets are ficient and the unexpected component truly is efficient and the unexpected component truly is unpredictable What do we mean exactly when we say market efficiency?
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arket efficiency Market efficiency Information about securities is quickly and (on average) accurately reflected in prices. Thus, difficult to earn abnormal profits profits in excess of the costs of attaining information and after accounting for risk Efficiency is defined relative to a set of information A market is efficient with respect to a given information set if it is impossible to make abnormal profits (risk adjusted and net of costs) by trading on the basis of that information set. Three information sets are commonly considered…
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Three forms of the Efficient Markets Hypothesis (EMH) Weak form efficiency Today’s stock price contains all information available in past trade information (price and volume) Implies price charts don’t help predict the future Semi strong form Today’s stock price reflects all publicly available information (annual reports, earnings numbers, news articles, etc.) Implies analysts and others can’t use public information to consistently make abnormal profits. Strong form efficiency Today’s stock prices reflects all pertinent information (everything ‐‐ both public and private) Implies not even insiders can profit from their information
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plications of EMH Implications of EMH Prices respond rapidly to new information Future prices are difficult to predict
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MGMT310_lecture13_updated - Review ReviewQuestions 1....

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