Chapter 12 The Efficient Market Hypothesis Random Walk

Chapter 12 The Efficient Market Hypothesis Random Walk

Chapter 12 The Efficient Market Hypothesis Random Walk and the EMH Random Walk - stock prices are random Actually submartingale Expected price is positive over time Positive trend and random about the trend

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Security Prices McGraw-Hill/Irwin Random Walk with Positive Trend Time 2004 The McGraw-Hill Companies, Inc., All

Rights Reserved. Random Price Changes Why are price changes random? Prices react to information Flow of information is random Therefore, price changes are random McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

EMH and Competition Stock prices fully and accurately reflect publicly available information Once information becomes available, market participants analyze it Competition assures prices reflect information McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Forms of the EMH Weak Semi-strong Strong McGraw-Hill/Irwin

2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Stock Analysis Technical Analysis - using prices and volume information to predict future prices Weak form efficiency & technical analysis Fundamental Analysis - using economic and accounting information to predict stock prices Semi strong form efficiency & fundamental analysis

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Implications of Efficiency for Active or Passive Management Active Management Security analysis Timing

Passive Management Buy and Hold Index Funds McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Market Efficiency and Portfolio Management Even if the market is efficient a role exists for portfolio management

Appropriate risk level Tax considerations Other considerations McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Tests of Semi-strong Form: Anomalies

Small Firm Effect (January Effect) Neglected Firm Market to Book Ratios Post-Earnings Announcement Drift McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Implications of Test Results

Risk Premiums or market inefficiencies Anomalies or data mining Behavioral Interpretation Inefficiencies exist Caused by human behavior McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Behavioral Possibilities

Forecasting Errors Overconfidence Regret avoidance Framing and mental accounting errors McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. When the market risk premium declines,

stock prices will ________. A) rise B) fall C) recover D) have excess volatility Answer B McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. According to the efficient market hypothesis, __________. A) positive alphas on stocks will

disappear quickly B) low beta stocks are consistently underpriced C) high beta stocks are consistently overpriced D) None of the above answers is correct Answer A McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Research on the strong form of market efficiency shows that ________ are

generally able to achieve superior returns. A) members of the SEC B) the majority of professional mutual fund managers C) corporate insiders D) stock brokers Answer C McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The ______________ of the efficient market hypothesis suggests that there is little or

nothing to be gained from studying past stock price trends. A) weak form B) semi-weak form C) semi-strong form D) strong form Answer A McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which one of the following forms of market efficiency is violated if you can

earn excess return by buying stocks of firms which make merger announcements? A) Weak form. B) Semi-weak form. C) Semi-strong form. D) Strong form. Answer C McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The efficient market hypothesis suggests

that ___________. A) no investors can earn a positive return at any point in time. B) no investors can earn a positive return persistently over time. C) no investors can earn an excess return at any point in time. D) no investors can earn an excess return persistently over time Answer D McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

The January effect of small firms is greatest ________. A) in leap years B) in presidential election years C) late in the month D) early in the month Answer D McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which of the following has(have) been

considered market anomalies? A) the reversal effect B) the book-to-market effect C) the small-firm January effect D) All of the above have been considered market anomalies Answer D McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Empirical evidence supporting the semistrong form market efficiency suggests that investors should follow ____________

investment strategy. A) a passive B) an active C) a conservative D) an aggressive Answer A McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Recently Viewed Presentations

  • Chapter 14: Gender and Development Module 14.1 Gender

    Chapter 14: Gender and Development Module 14.1 Gender

    Chapter 14: Gender and Development Module 14.1 Gender Stereotypes Module 14.2 Differences Related to Gender Module 14.3 Gender Identity Module 14.4 Gender Roles in Transition
  • THE POSTWAR BOOM - Mr. Sutton's Class!

    THE POSTWAR BOOM - Mr. Sutton's Class!

    The "Company Man" Corporate America became the symbol for modernity and prestige. Working for/at a corporation meant you were important. Corporations were largely run with a strong leadership hierarchy; you did your job, reported to your immediate supervisor, and was...
  • Two Types of Loops

    Two Types of Loops

    CICLOS por Profesora Lillian Bras Ciclos anidados Igual que podemos anidar los if's también podemos anidar los ciclos. Ciclos anidados significa que hay un ciclo dentro de otro, cuando esto sucede el ciclo interior se ejecuta completo( todas sus iteraciones)...
  • Central Facility Presentation - Eumetrain

    Central Facility Presentation - Eumetrain

    Guinea Mali MSG-1 8 September 2003 12:00 - 15:15 UTC RGB Composite R = VIS0.6 G = IR3.9 B = IR10.8 Hurricane Isabel Click on the image to see the animation ! Guinea Mali MSG-1 8 September 2003 12:00 -...
  • The Rise of the Corporation - Bob Farley Homepage

    The Rise of the Corporation - Bob Farley Homepage

    The death. withdrawal, bankruptcy, or incapacity of any of its shareholders or managers has no effect on the corporation's existence. (See BCL §202 a 1) Free Transferability of Interests The interest of the corporation's owners is divided into shares. and...
  • Literary Genres - Winston-Salem/Forsyth County Schools

    Literary Genres - Winston-Salem/Forsyth County Schools

    Literary Genres. Short Stories. Usually fictional. Short in length COMPARED to a Novel. Usually only one main conflict. Literary Genres. Drama. A form of storytelling that is composed primarily of dialogue and is viewed by an audience. Literary Genres. Novel.
  • Deep Tunnel Overview

    Deep Tunnel Overview

    Deep Tunnel Components. Flow will be diverted from CSO outfall structures and consolidated through soft-ground surface sewers, where it will enter one of the 33 planned drop shafts.
  • Proposed Bazaar Floor Plan 58th MD308 Convention 2020

    Proposed Bazaar Floor Plan 58th MD308 Convention 2020

    Proposed Bazaar Floor Plan 58th MD308 Convention 2020 10 9 CONVENTION SECTARIAT ROOM 1 11 TOTAL: 27 BOOTHS 2 12 14 20 21 22 23 3 13 15 4 5 18 16 Escalator 6 Escalator