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Description
Flashcards by Ryan Whitaker, updated more than 1 year ago
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Created by Ryan Whitaker
almost 7 years ago
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| Question | Answer |
| What is an efficient capital market? | AN ECM is one in which prices adjust instantaneously and in an unbiased fashion to the revealing of new info. No one should be able to make returns. If interests rates drop, we expect CW bond prices to rise. |
| What would cause a market to be efficient? | The main argument in support of efficiency is the existence of a competitive market in which numerous investors compete to make abnormal returns. Investors will make quick decisions based on information available. Increasing the quality and quantity of info to the public maximises market effciency. |
| Define & discuss the WEAK-FORM form Efficient Market Hypothesis. | Weak-form EMH states that current prices reflect all available security-market information This INCLUDES the historical sequence of prices, price changes, and any volume information. There should be no link between past price changes and future price changes. |
| Define & discuss the SEMI STRONG-FORM form Efficient Market Hypothesis. | The semi strong-form EMH states that security prices adjust rapidly to release of new public info and nonmarket public info such as stock splits, economic new, political news ETC. |
| Define & discuss the STRONG-FORM form Efficient Market Hypothesis. | The strong-form EMH states that stock prices fully reflect all info, whether public or private. It requires no group of investors have monopolistic access to any info. Can be tested by comparing trades of insiders vs fund managers |
| Discuss what is meant by the joint test issues in EMH test. | Studies on market efficiency are considered to be dual tests of the EMH and a pricing model ( e.g. CAPM). Test involved joint hypothesis because they consider not only the efficiency of the market, but also are dependent on the asset pricing model that provides a measure of risk used in the test. |
| What does the EMH imply for a TECHNICAL ANALYST? | Information spreading process is slow - therefore adjustment of prices is not immediate and forms a pattern. This contradicts the concept of efficient capital markets which spread news rapidly = prices reflect all information |
| What does EMH imply for a FUNDAMENTAL ANALYST | Fundamental analysis state that at one point in time there is a basic intrinsic value for stocks and securities. If this intrinsic value is substantially different from the prevailing market value, the investor should make a decision. |
| What does EMH imply for a portfolio manager? | Portfolio manager should focus on areas where they have expertise. The portfolio manager should create portfolios approximating the risk and returns desired by the client. Should also diversify and reduce all unsystematic risk |
| Can a market be weak form inefficient, but strong form efficient? | No, a weak form inefficient market assumes abnormal returns can be made from previous data. Whereas a strong form efficient market implies all past and current data is reflected in the shareprice. This would be a contradiction and therefore the market can only be one form of efficiency. |
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