Unformatted text preview: Imitate the product? Sooner or later competition is likely to eliminate economic rents. Download free ebooks at bookboon.com
48 Corporate Finance Market efﬁciency 7. Market efficiency
In an efficient market the return on a security is compensating the investor for time value of money and
risk. The efficient market theory relies on the fact that stock prices follow a random walk, which means
that price changes are independent of one another. Thus, stock prices follow a random walk if
- The movement of stock prices from day to day do not reflect any pattern
o The movement of stock prices is random
o Time series of stock returns has low autocorrelation In an efficient market competition ensures that
- New information is quickly and fully assimilated into prices
All available information is reflected in the stock price
Prices reflect the known and expected, and respond only to new information
Price changes occur in an unpredictable way Turning a challenge into a learning curve.
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12