Actual Efficiency

Actual Efficiency - 600 million shares were traded No...

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Actual Efficiency 1. Trading rules using past stock prices fail to produce above normal returns and investors cannot use publicly available information to earn above normal returns. However, inside information can produce above normal profits. 2. Investors should not be able to earn above normal profits by buying and selling individual stocks or groups of stocks. o small-firm effect o January effect o Value Line enigma o closed end mutual funds 3. mean reversion 4. excessive volatility 1987 Stock Market Crash On Monday, October 19, 1987, the Dow Jones Industrial Average fell 508 points (23%). A record
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Unformatted text preview: 600 million shares were traded. No apparent fundamental can explain it. Explanations: 1. noise traders - overreact to good or bad news 2. bubbles - self-fulfilling departures from fundamentals which continue until, for some reason, the conditions for self-fulfillment disappear 3. trading mechanisms - large sell orders overwhelmed the spets who match buyers and sellers for individual stocks Costs of Inefficiency 1. excessive price fluctuations which do not reflect shifts in fundamental value 2. resources spent obtaining the information missing from market prices...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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