AFM 121 Topic 3

AFM 121 Topic 3 - AFM 121 Topic 3 Efficient market...

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AFM 121 Topic 3 Efficient market hypothesis (EMH): the hypothesis stating that, as a practical matter, investors cannot consistently “beat the market”. Excess return: a return in excess of that earned by other investments having the same risk. Economic forces leading to EM: 1. Investor rationality; 2. Independent deviations from rationality; and 3. Arbitrage FORMS OF MARKET EFFICIENCY Weak-form EM: past price and volume useless Semistrong-from: all publicly available info useless Strong-form: all info of any kind, pub or pri Nested relationship Driving force toward market efficiency: competition and profit motive Predictability is not sufficient enough to earn an excess return Random walk: no discernible pattern to the path that a stock price follows through time. Efficient market reaction: the price instantaneously adjusts to, and fully reflects, new info. Delayed reaction: the price partially adjusts to the new info, but days elapse before the price completely reflects new info. Overreaction and correction: the price overadjusts to the new info; it overshoots the appropriate new price but eventually falls to the new price. Event study: a research method designed to help study the effects of news on stock prices. Abnormal return: the remaining return on a stock after overall market returns have been
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This note was uploaded on 02/15/2012 for the course AFM 121 taught by Professor Mr.tom during the Winter '11 term at Waterloo.

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AFM 121 Topic 3 - AFM 121 Topic 3 Efficient market...

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