Opinion about their potential for future growth and

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opinion about their potential for future growth and profits Value of new, secret TV project is not reflected in its current price If market agrees with positive NPV assessment of new project stock price rises when decision to launch is made public Efficient market = price adjusts immediately to new info The Efficient Markets Hypothesis EMH: hypothesis is that actual capital markets (e.g. TSX) are efficient While inefficiencies may exist, there are insignificant and not common All investments in an efficient market are 0 NPV investments If prices are too low/high difference between MV of investment and its costs = 0 thus NPV = 0 In an efficient market investors get exactly what they pay for when they buy securities firms receive exactly what their stocks/bonds are worth when they sell them What makes a market efficient? o Competition among investors If you know more info about company than other investors, you can profit from that knowledge by investing in stock if good news and selling it if bad news o Sufficient access to info Financial markets probably more efficient than real asset markets Prices fluctuate reflection of constant info flow Absence of price movements suggest inefficiency
Market Efficiency – Forms and Evidence 3 forms of market efficiency: 1) Weak form efficient Current price of stock reflects its own past prices Studying past prices to identify mispriced securities futile Successive price changes are generally consistent with a random walk where deviations from expected return are random 2) Semistrong form efficient Most controversial implies that person who tries to identify misprice stocks using F/S info is wasting time b/c that info is already included in stock price All public info is reflected in stock price News tend to leak out and be reflected in stock price even before official release of info Fund manager return = investor return in market fund manager can’t beat market 3) Strong form efficient All info of every kind is reflected in stock prices No such thing as inside info Difference between these forms relates to what info is reflected in prices But inside info exists, can be valuable to possess Can conclude that private info about a stock may exist that isn’t currently reflected in stock price Anomalies: stock market crash in 2008, seasonal movements in markets with no rational explanations What does research on capital market history say about market efficiency?

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