Unformatted text preview: market’s direction. Remember the first lesson of market
efficiency: Markets have no memory. The decision as to when to issue stock should be
made without reference to ‘market cycles.’ 11. The efficientmarket hypothesis says that there is no easy way to make money. Thus,
when such an opportunity seems to present itself, we should be very skeptical. For
example: In the case of short versus longterm rates, and borrowing shortterm versus long
term, there are different risks involved. For example, suppose that we need the
money longterm but we borrow shortterm. When the shortterm note is due, we
must somehow refinance. However; this may not be possible, or may only
possible at a very high interest rate. In the case of Japanese versus United States interest rates, there is the risk that
the Japanese yen U.S. dollar exchange rate will change during the period of time
for which we have invested. 12. Some key points are as follows:
a. Unidentified Risk Factor: From an economic standpoint, given the information
available and the number of participants, it is hard to believe that any securities
market in the U.S is not very efficient. Thus, the most likely explanation for the
smallfirm effect is that the model used to estimate expected returns is incorrect,
and that there is some asyetunidentified risk factor.
b. Coincidence: In statistical inference, we never prove an affirmative fact. The best
we can do is to accept or reject a specified hypothesis with a given degree of
confidence. Thus, no matter what the outcome of a statistical test, there is always
a possibility, however slight, that the smallfirm effect is simply the result of
statistical...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.
 Fall '04
 JAMESBRIDGEMAN
 Math

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