Assignment # 3

Efficient Capital Markets

FIN 402 – Security Analysis and Portfolio

Management
Your Name
15th April 2020
Efficient Capital Markets
Look up the daily trading volume for the following stocks during a recent five-day period:
1. Merck 
2. Caterpillar 
3. Intel 
4. McDonald’s 
5. General Electric
Randomly select five stocks from the NYSE and examine their daily trading volume for
the same five days. 
a. What are the average volumes for the two samples? 

Answer:
The average volume of two samples of five stocks from NYSE is as follows;

Trading volume of two samples of stocks of NYSE

From 07-Apr to 14-Apr-2020
Companies Avg Vol (5 days average)
CATERPILLAR INC DEL (CAT) 7,123,635
INTEL CORP (INTC) 31,514,172

b. Would you expect this difference to have an impact on the efficiency of the markets
from the two samples? Why or why not?

Answer:
The term Market efficiency refers to the degree of how truly current prices reflect all
available relevant information about the actual value of assets.
The market is efficient when all information is already incorporated into prices, and so
there is no way to "beat" the market because there are no undervalued or overvalued
assets available.

Volume does have an impact on Market Efficiency

In technicals volume measures the number of stock’s traded in a day on an exchange.
Volume is an important tool to analyze the trend and perceive it as a buying or selling
signal.
Any good news may increase the stock price and volume, it indicates that some
fundamental or psychological factors are driving the stock price.

When volume decreases but stock price increases, it indicates traders’ are indecisive to
buy the stock. Then there are more chances that trends could change.

When volume increases but stock price decreases, this indicates that traders are selling
stocks due to some fundamental or psychological factors.
When volume and stock price decreases, it indicates traders’ are indecisive to sell the
stock. Then there are more chances that trends could change.

Traders use these trends as an entry and exit signals.

On contrast to above, these signals have no impact on the efficiency of the

Market

Weak form efficiency believes that future events are random and cannot rely on past
stock prices and volumes.

Technical trend analysis is useless in the week form of efficient market as nothing will
add value through analysis past prices and volume since this will not help in predicting
future performance.