Finance Final- Chapter 5

Random Walk Hypothesis The theory that stock price movements are unpredictable and thus theres little way of knowing where future prices are headed
Efficient Markets Hypothesis the hypothesis that securities are typically in equilibrium-that they are failry priced in the sense that the price reflects all publicly available information on each security
Strong Form Efficiency assumes that all information pertaining to a stock, whether public or inside information, is reflected in current market prices. Thus no investor would be able to earn abnormal returns in the stock market
Semi Strong Form Efficiency current market prices reflect all publicly avaiable information. Therefore the only way to gain abnormal returns on a stock is to possess inside information about the company’s stock
Weak Form Efficiency assumes that all information contained in past price movements is fully reflected in current market prices. Thus information about recent trends in a stock’s price is of no use in selecting a stock
Assumptions of EMH investors constantly monitoring and trading any given security, information is avail. to all investors at the same time and is free, information on events occurs randomly, investors react quickly and accurately to new information causing prices to adjust quickly and accurately
Implications of EMH Future Market prices cannot be predicted based on available information, Investors in these markets have 0 NPV, expected rate of return = required, expected ROR compensates the investor for the risk, abnormally high returns are pure chance
Behavioral Finance Incorporates elements of cognitive psychology to better understand how individuals and markets respond to different situations

Leave a Reply

Your email address will not be published. Required fields are marked *