FIN401-CH.8-9 classnotes

FIN401-CH.8-9 classnotes - FIN 401 Principles of...

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FIN 401 – Principles of Investments and Security Markets Chapter 8: The Efficient Market Hypothesis Chapter 9: Behavioral Finance and Technical Analysis
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Market efficient A market is efficient if the market value of assets are unbiased (asset prices are correct, no systematic which to tell if prices are too high or too low) estimates of their true value. This does not imply that market prices are equal to true value for all assets. It implies there are no systematic biases… there is an equal chance that the asset is under- or overvalued. Deviations from fundamental value are random
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Market Efficiency Stock prices appear to be a random walk. Successive changes in value are independent. Day to day price changes are effectively uncorrelated (undependable of one another). Clarifying example (random walk)… Coin toss game… • Heads you win 3% of investment • Tails you lose 2.5% of investment Toss coin at end of each week Random walk with positive drift of 0.25%
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Market Efficiency What if prices changes were predictable? Investors could make easy profits (investors would trade on that predictability and then they would eliminate the predictability) However, investors would eliminate these profit opportunities through trading All information in past prices would be reflected in today’s stock price. Price changes would once again be independent from day to day.
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This note was uploaded on 11/15/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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FIN401-CH.8-9 classnotes - FIN 401 Principles of...

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