CAPITAL MARKET NOTES

Market efficiency theory suggests that market is rational and provides correct pricing. That is,
the current prices of securities are close to their fundamental values because of either the rational
investors or the arbitragers' buy and sell action of underpriced or overpriced stocks. It's called
the rational market theory. And what it said, in a very brief nutshell, is that the market is always
right. 
Arbitrage is an investment strategy in which an investor simultaneously buys and sells an asset in
different markets to take advantage of a price difference and generate a profit.
The efficient market hypothesis (EMH) or theory states that share prices reflect all information.
The EMH hypothesizes that stocks trade at their fair market value on exchanges.
FORM OF MARKET EFFICIENCY
1. Weak form efficiency states that past prices, historical values, and trends can't predict future
prices. Weak form efficiency is an element of efficient market hypothesis. Weak form efficiency
states that stock prices reflect all current information.
2. The semi-strong efficiency EMH form hypothesis contends that a security's price movements
are a reflection of publicly-available material information. It suggests that fundamental and
technical analysis are useless in predicting a stock's future price movement.
3. The strong form version of the efficient market hypothesis states that all information—both the
information available to the public and any information not publicly known—is completely accounted
for in current stock prices, and there is no type of information that can give an investor an advantage
on the market.
IMPLICATION OF MARKET EFFICIENCY
The implication of EMH is that investors shouldn't be able to beat the market because all
information that could predict performance is already built into the stock price. It is assumed
that stock prices follow a random walk, meaning that they're determined by today's news rather than
past stock price movements.
What is the basic random walk theory?
What Is the Random Walk Theory? Random walk theory suggests that changes in stock prices
have the same distribution and are independent of each other. Therefore, it assumes the past
movement or trend of a stock price or market cannot be used to predict its future movement.
HOW NEW INFORMATION GETS INTO STOCK PRICES
How is stock price determined?
Stock prices tick up and down constantly due to fluctuations in supply and demand. If more people
want to buy a stock, its market price will increase. If more people are trying to sell a stock, its price
will fall. The relationship between supply and demand is highly sensitive to the news of the moment.
INFORMED TRADERS AND INSIDER TRADING
What is an informed trader?
The authors define informed investors as investors trading with superior knowledge of the probability
distribution of share prices, through either access to private information or skillful processing of public
information.
What is insider trading?
Insider trading is whenever someone uses market-moving nonpublic information in the act of buying
or selling a financial asset.
For example, say you work as an executive at a company that plans to make an acquisition. If it’s not
public, that would count as inside information. It becomes a crime if you either tell a friend about it –
and that person then buys or sells a financial asset using that information – or if you make a trade
yourself.
Punishment, if you’re convicted for insider trading, can range from a few months to over a decade
behind bars.
What is a non-public information?
Nonpublic information is information that has not been previously disclosed to the general
public and is otherwise not available to the general public.
IMPLICATIONS: IF MARKET ARE EFFICIENT.
Securities selection is the process of determining which financial securities are included in a
specific portfolio. Proper security selection can generate profits during market upswings and
weather losses during market downturns.
WHAT IS THE ROLE FOR PORTFOLIO MANAGERS IN AN EFFICIENT MARKET?
Well-diversified portfolio means a portfolio that includes a variety of securities through different
companies so that the weight of any security is small.
MARKET ANOMALIES
Baffling means mysterious.
THE DAY-OF-THE-WEEK EFFECT
The day-of-the-week effects refer to the tendency of stocks to exhibit relatively large returns on
one particular day (for example, Friday) compared to the rest of the days in the week.
THE AMAZING JANUARY EFFECT
The January Effect is a purported market anomaly whereby stock prices tend to regularly rise in
the first month of the year. 
That is why, during the last quarter of the year, buying power of stocks is very high because the
prices are low, perhaps, very low.
What stocks are in the small caps?
Understanding Small-Cap Stocks
TSLA. Tesla Inc. AMZN. Amazon.com, Inc.
AAPL. Apple Inc. WMT. Walmart Inc.
NKE. NIKE INC. KEY TAKEAWAYS
A small-cap stock is generally that of a company with a market capitalization of between $300 million
and $2 billion. Small-cap stock investors seek to beat institutional investors by focusing on growth
opportunities. Small-cap stocks historically have outperformed large-cap stocks but are also more
volatile and riskier.
THE-TURN-OF-THE-YEAR EFFECT
The "turn-of-the-year” effect is a well-documented stock market phenomenon in which low
capitalization “small stocks" receive relatively higher returns than high capitalization “big
stocks" on the last trading day of December and the first 8 trading days of January.
BUBBLES AND CRASHES
Key Takeaways. A bubble is an economic cycle that is characterized by the rapid escalation of
market value, particularly in the price of assets. This fast inflation is followed by a quick decrease
in value, or a contraction, that is sometimes referred to as a "crash" or a "bubble burst. “
Bubble: Examples. Two famous early stock market bubbles were the Mississippi Scheme in France
and the South Sea bubble in England. Both bubbles came to an abrupt end in 1720, bankrupting
thousands of unfortunate investors.
Famous stock market crashes include those during the 1929 Great Depression, Black Monday of
1987, the 2001 dotcom bubble burst, the 2008 financial crisis, and during the 2020 COVID-19
pandemic.