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Unformatted text preview: » Random Price Changes • Why are price ch~gR random? .- Prices react to ~r-=~,==-- The flow of \) .s random- Therefore, price changes are random • If price changes were not random, then profits could easily be made • The lure of such profits would induce trading and cause prices to re-adjust until price changes were random again Implications of Efficiency for Portfolio Management • Active Management- Security analysis: Identifying mis-priced stocks- Timing: Changing allocations between the risky and risk-free assets at the right times- Requires information that is not known by all investors (information gathering can be expensive) • Passive Management- Buy and Hold: Form a well-diversified portfolio and don't change the composition of the portfolio- Index Funds: A convenient vehicle for passive portfolio management Empirical Tests of Market Efficiency • Event studies- Look at stock price changes surrounding the release of some new piece ofinformation- How quickly is the information incorporated into price?How quickly is the information incorporated into price?...
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.
- Fall '10