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The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices instantly 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 randomly and rapidly adjusting prices. Testing involves seeing if known strategies produce abnormal risk-adjusted returns after costs. An efficient market implies things like technical analysis are useless and fundamental analysts cannot consistently outperform.
The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices instantly 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 randomly and rapidly adjusting prices. Testing involves seeing if known strategies produce abnormal risk-adjusted returns after costs. An efficient market implies things like technical analysis are useless and fundamental analysts cannot consistently outperform.
The document discusses market efficiency and the efficient market hypothesis. It defines an efficient market as one where security prices instantly 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 randomly and rapidly adjusting prices. Testing involves seeing if known strategies produce abnormal risk-adjusted returns after costs. An efficient market implies things like technical analysis are useless and fundamental analysts cannot consistently outperform.
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