10 figure1210 efficientcapitalmarkets

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Unformatted text preview: % 0.0% Variance and Standard Deviation Variance and Standard Deviation Variance and standard deviation measure the volatility of asset returns The greater the volatility the greater the uncertainty Standard deviation = square root of the variance Figure 12.10 Figure 12.10 Efficient Capital Markets Efficient Capital Markets Stock prices are in equilibrium or are “fairly” priced If this is true, then you should not be able to earn “abnormal” or “excess” returns Efficient markets DO NOT imply that investors cannot earn a positive return in the stock market What Makes Markets Efficient? What Makes Markets Efficient? There are many investors out there doing research As new information comes to market, this information is analyzed and trades are made based on this information Therefore, prices should reflect all available public information If investors stop researching stocks, then the market will not be efficient Common Misconceptions about Common Misconceptions about EMH Efficient markets do not mean that you can’t make money They do mean that, on average, you will earn a return that is appropriate for the risk undertaken and there is not a bias in prices that can be exploited to earn excess returns Market efficiency will not protect you from wrong choices if you do not diversify – you still don’t want to put all your eggs in one basket Strong Form Efficiency Strong Form Efficiency Prices reflect all information,...
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This document was uploaded on 01/14/2014.

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