Lecture+14+Nov+2+2011

Lecture+14+Nov+2+2011 - FINA3104:...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 14 – The Efficient Market Hypothesis and Behavioral Finance (continued) Darwin Choi November 2, 2011 Recap from Last Lecture Randomness & Market Efficiency Information & Market Efficiency Forms of Market Efficiency 2
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Outline of Today’s Lecture Technical, Fundamental & Insider Trading Analysis Testing Market Efficiency Anomalies & Market Efficiency Behavioral Finance: An Introduction 3 Technical Analysis Search for recurrent patterns in security prices Studies past trading data Says prices move in predictable waves & ways Opposite of Efficient Market Theory: Successful trading rules should self destruct as they become known & widely used by traders… 4
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Fundamental Analysis Builds from firm basics up to security prices E.g., Discounted cash flow analysis of firm prospects Strives to find information not already in prices Unless non public information is uncovered, Efficient Market Theory this exercise is futile More accurate analysis is the only way to profit Only large investors can hope to cover costs 5 Insider Trading Analysis Can investors benefit by following insiders’ trades? (Insiders must report their trades within 2 business days to regulators, and may not trade on inside information) Can investors mimic insiders and make an abnormal return? Not in the data Either insiders obey the law and only trade for personal reasons Or the reporting lag is too long to be useful Or markets are strong form efficient 6
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Strong
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Fall '11 term at HKUST.

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Lecture+14+Nov+2+2011 - FINA3104:...

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