Capital Markets Efficiency

Vocabulary

arbitrage

process of purchasing securities in one market and selling them in another market, usually immediately after purchase, to profit from price differences in the markets

beta

amount of systematic risk an asset or portfolio has with respect to the market

capital asset pricing model (CAPM)

model based on the economic theory that postulates that the expected return of a securities asset depends on its level of systematic risk

day trading

practice of purchasing and then immediately selling a security on the same day on the basis of price fluctuations

efficient market hypothesis

idea that all securities trading opportunities are fairly priced because the price of a security always accurately reflects future performance in alignment with investors' information

elastic demand

occurs when a small change in price is paired with a large change in quantity demanded. Demand elasticity is calculated by dividing the percentage change of quantity demanded by the percentage change in price.

elastic market

marketplace where quantity demanded of an item is responsive to changes in price. The greater the proportional disparity, the more elastic the marketplace.

Great Depression

greatest economic collapse in the history of the modern industrialized world. It started in late 1929 and continued throughout the 1930s.

gross domestic product (GDP)

general gauge of the overall economic status of a country in terms of goods and services produced by that country

inefficient market

marketplace based on the idea that a security's market price does not always reflect its true value and thus investors can employ strategies to improve returns

inelastic market

marketplace where quantity demanded is minimally responsive to changes in price. The smaller the proportional disparity, the more inelastic the marketplace.

perfect competition

market structure in which demand is perfectly elastic. The market usually contains a large number of competitors selling identical products that are easy to sell.

perfectly efficient market

marketplace based on the securities trading concept that all trading opportunities are fairly priced because investors have already accounted for all available information in setting a price

price elasticity of demand

measure of how responsive the quantity demanded of an item is to changes in the price of that item

price elasticity of supply

measure of how responsive businesses are to production of an item in relation to changes in the price of that item

profit maximization

determination of the best price and output level that results in the greatest profit.

security market line (SML)

straight line that positively slopes and shows the relationship between the expected return of an asset class and beta

semi-strong form efficient market

marketplace in which all publicly available information, including past and current, is reflected in prices

strong form efficient market

marketplace in which all information, public and private, past and current, is reflected in asset prices

total revenue

measure of price times quantity sold. Businesses seek to determine at what price to sell goods in order to maximize revenue.

unit elastic demand

demand that occurs when the percentage change in quantity demanded is equal to the percentage change in price for a product

weak form efficient market

marketplace in which prices reflect only current information and past information has no relationship with current market prices