The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices fully reflect all available information. There are three forms of market efficiency - weak, semi-strong, and strong - based on what information is reflected in prices. For a market to be efficient, it requires many independent investors analyzing information and rapidly adjusting prices, as well as new information arriving randomly. Testing involves seeing if known strategies can consistently earn abnormal returns after adjusting for risk and costs. The implications are that technical analysis is useless and fundamental analysts may not outperform passive investment strategies in a semi-strong efficient market.
The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices fully reflect all available information. There are three forms of market efficiency - weak, semi-strong, and strong - based on what information is reflected in prices. For a market to be efficient, it requires many independent investors analyzing information and rapidly adjusting prices, as well as new information arriving randomly. Testing involves seeing if known strategies can consistently earn abnormal returns after adjusting for risk and costs. The implications are that technical analysis is useless and fundamental analysts may not outperform passive investment strategies in a semi-strong efficient market.
The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices fully reflect all available information. There are three forms of market efficiency - weak, semi-strong, and strong - based on what information is reflected in prices. For a market to be efficient, it requires many independent investors analyzing information and rapidly adjusting prices, as well as new information arriving randomly. Testing involves seeing if known strategies can consistently earn abnormal returns after adjusting for risk and costs. The implications are that technical analysis is useless and fundamental analysts may not outperform passive investment strategies in a semi-strong efficient market.
which security prices adjust fully and rapidly to the arrival of new information and, therefore, the current prices of securities fully reflect all available information about the security. 3 sufficient conditions for an efficient market (Fama)
A large number of competing profit-
maximizing participants analyze and value securities, each “independent” of the others. New information comes in a “random” fashion. The competing investors attempt to adjust security prices rapidly to reflect the effect of new information. 3 forms of market efficiency, I
Weak form: prices reflect all information
contained in the history of past trading. Question: do past returns and prices predict future returns? 3 forms of market efficiency, II
Semi-strong form: prices reflect all publicly
available information (earnings, dividends, PE ratios, book-to-market ratios, political news, etc.) Question: how quickly do prices reflect all public information? 3 forms of market efficiency, III
Strong form: prices reflect all relevant
information, including inside information. Question: Do insiders make abnormal returns? Testing
Does a known strategy produce consistently
abnormal returns after adjusting for investment risk and transaction costs? No: the market is quite efficient. Yes: evidence against the EMH. Implications, I
In an efficient market, technical analysis is
useless. In a semi-strong form efficient market, fundamental analysts (country analysts, industry analysts, and company analysts), on average, will not outperform the market. Implications, II
In a semi-strong form efficient market,
fundamental analysis is useless. In this market, a portfolio manager should: (1) determine a proper level of risk tolerance, (2) form a portfolio consisting of the risk-free asset and a well-diversified risky portfolio (passive management), and (3) minimize taxes and total transaction costs. Passive management
No attempt to find undervalued securities.
No attempt to time. Hold a well-diversified portfolio. Active management/selection