Week 7 - Week 7: Efficient Market Hypothesis Cameron Truong...

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1 Week 7: Efficient Market Hypothesis Cameron Truong Objectives and learning outcomes Appreciate the concept of market efficiency. Identify the three forms of market efficiency. Appreciate the implications of market efficiency. Identify the differences between fundamental and technical analysis. General definition of market efficiency FIN251 Market efficiency The market is efficient if the share price reflects all relevant information; adjusts rapidly to new information; and is an unbiased estimate of its true value. If the market is efficient, investors cannot consistently make abnormal risk-adjusted returns from trading in the market.
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2 Department of Accounting and Finance Slide 4 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 If the market is efficient, the share price would be fair in light of the information available to all investors. Investors must have symmetric information in an efficient market so that no one is in a disadvantage position. If information is asymmetric , it would be possible to issue securities for more than the present value of their expected cash flows.
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This note was uploaded on 10/08/2011 for the course FINANCE 101 taught by Professor Jannis during the Three '11 term at Monash.

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Week 7 - Week 7: Efficient Market Hypothesis Cameron Truong...

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