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Unformatted text preview: bnormal returns. Thus, it can be accepted that there is strong form efficiency. Note
that insider trader is illegal. To control corporate insiders, they are required to disclose their trading on shares
of their companies within a specified time frame to the stock exchange for public release to the market.
For legal reasons, it is unlikely that published trades are based on insider information. Insiders may buy and
share sells of the company for legitimate reasons, such as the selling of shares because of the increased equity
exposure to their companies. Thus studies on the profitability of these published trades is to test whether the
market is semi-strong form efficient in processing publicly available information, rather than testing for strong
8 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 Although corporate insiders on average earned profits on trading their own stocks, investors are not able to
make any abnormal returns by following their actions. This implies that the market is semi-strong form
efficient, as the information content is fully reflected by the stock prices once the trades are known to the
In summary, the market efficiency and its link to the CAPM was examined. It is the disbelief in the CAPM’s
assumptions of investors having homogeneous information and behaving rationally that motivates a number
of market participants to search for information and identify strategies that can beat the market. 9 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 L ECTURE 10 – P AYOFF AND PROFIT/LOSS DIAGRAMS
E X-CHANGE TRADED VS. OTC OPTIONS
Options are derivatives, which gives the holder a right to buy or sell the underlying asset at a predetermined
price. Its value is determined by the value of the underlying asset, such as a currency, stock, market index,
Exchange traded options are standardized by and traded in an organized exchange such as the CBOE and the
ASX. Over-the-counter options are options negotiated privately negotiated contract which is tailor-made to
suit the requirements of the party initiating the trade. The focus...
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