Chapter 6 - x - Lecture Presentation Software to accompany...

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Unformatted text preview: Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Eighth Edition by Frank K. Reilly & Keith C. Brown Chapter 6 Chapter 6 Efficient Capital Markets Questions to be answered: What is does it mean to say that capital markets are efficient? Why should capital markets be efficient? What factors contribute to an efficient market? Given the overall efficient market hypothesis, what are the three sub-hypotheses and what are the implications of each of them? Chapter 6 Efficient Capital Markets How do you test the three efficient market hypothesis (EMH) and what are the results of the tests? For each set of tests, which results support the hypothesis and which results indicate an anomaly related to the hypothesis? What is behavioral finance and how does it relate to the EMH? Chapter 6 Efficient Capital Markets What are the major findings of behavioral finance and what are the implications of these findings for EMH? What are the implications of the efficient market hypothesis test results for Technical analysis? Fundamental analysis? Portfolio managers with superior analysts? Portfolio managers with inferior analysts? Efficient Capital Markets In an efficient capital market, security prices adjust rapidly to the arrival of new information. Therefore, the current prices of securities reflect all information about the security Whether markets are efficient has been extensively researched and remains controversial Why Should Capital Markets Be Efficient? The premises of an efficient market A large number of competing profit-maximizing participants analyze and value securities, each independently of the others New information regarding securities comes to the market in a random fashion Profit-maximizing investors adjust security prices rapidly to reflect the effect of new information Conclusion: In an efficient market, the expected returns implicit in the current price of a security Alternative Efficient Market Hypotheses (EMH) Random Walk Hypothesis changes in security prices occur randomly Fair Game Model current market price reflect all available information about a security and the expected return based upon this price is consistent with its risk Efficient Market Hypothesis (EMH) - divided into three sub-hypotheses depending on the information set involved Efficient Market Hypotheses (EMH) Weak-Form EMH - prices reflect all security-market information Semistrong-form EMH - prices reflect all public information Strong-form EMH - prices reflect all public and private information Weak-Form EMH Current prices reflect all security-market information, including the historical sequence of prices, rates of return, trading volume data, and other market-generated information This implies that past rates of return and other market data should have no relationship with future rates of return Semistrong-Form EMH Current security prices reflect all public...
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This note was uploaded on 06/02/2011 for the course FINA 3331 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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Chapter 6 - x - Lecture Presentation Software to accompany...

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