bài giảng investment analysis and management chapter 12

 Efficient Markets reflect all available information... Conditions for an Efficient Market  Large number of rational, profit-maximizing investors  Information is costless, widely avai

Chapter 12 Charles P Jones, Investments: Analysis and Management,

Tenth Edition, John Wiley & Sons

Market Efficiency

Efficient Markets

 How well do markets respond to new

information?

 Should it be possible to decide between

a profitable and unprofitable

investment given current information?

 Efficient Markets

reflect all available information

Conditions for an Efficient

Market

 Large number of rational,

profit-maximizing investors

 Information is costless, widely

available, generated in a random

fashion

 Investors react quickly and fully to new

Consequences of Efficient

Market

 Quick price adjustment in response to the arrival of random information

makes the reward for analysis low

 Prices reflect all available information

 Price changes are independent of one another and move in a random fashion

Market Efficiency Forms

 Efficient market hypothesis

quickly and fully reflect different available information?

 Three levels of Market Efficiency

 Market adjusts or incorporates this

information quickly and fully

Semistrong Form

 Prices reflect all publicly available

information

 Investors cannot act on new public

information after its announcement and expect to earn above-average, risk-

adjusted returns

 Encompasses weak form as a subset

 Encompasses weak and semistrong

forms as subsets

Evidence on Market

Efficiency

 Keys:

earned

 Economically efficient markets

exploit any discrepancies and earn unusual returns

Weak Form Evidence

 Test for independence (randomness) of stock price changes

not exist

 Test for profitability of trading rules

after brokerage costs

Semistrong Form

Evidence

 Event studies

surrounding a particular event

 The residual error between the security’s actual return and that given by the index model

 Abnormal return (Arit) =Rit - E(Rit)

 Cumulative when a sum of Arit

 Only issues purchased

at offer price yield abnormal returns

news

 Little impact on price after release

Strong Form Evidence

 Test performance of groups which have access to nonpublic information

information

earned abnormal returns on their stock

transactions

 Insider transactions must be publicly

 Fundamental analysis of intrinsic value

Implications of Efficient

Market Hypothesis

 For professional money managers

 Passive investing favored

 Otherwise must believe in superior insight

 Maintain correct diversification

 Achieve and maintain desired portfolio risk

 Manage tax burden

but significant amount after

should not exist

 Should portfolio be based on P/E ratios?

Market Anomalies

 Size effect

risk-adjusted returns than large firms

Market Anomalies

 Value Line Ranking System

from best (1) to worst (5)

 Probable price performance in next 12 months

return of 19.3%

 Best investment letter performance overall

Behavioral Finance

 Rationality as a principle of behavior

 Are there systematic deviations from

the norms of rationality?

 How do human beings make decisions?

decision-making

 In making predictions, perceiving the

environment

Conclusions About

Market Efficiency

 Support for market efficiency is

persuasive

explained satisfactorily

 Markets very efficient but not totally

analysis beyond the norm must be done

Conclusions About

Market Efficiency

 If markets operationally efficient, some investors with the skill to detect a

divergence between price and

semistrong value earn profits

 Controversy about the degree of

market efficiency still remains

Copyright 2006 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that

permitted in Section 117 of the 1976 United states

Copyright Act without the express written permission of the copyright owner is unlawful Request for further

information should be addressed to the Permissions

department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no

responsibility for errors, omissions, or damages, caused

by the use of these programs or from the use of the

information contained herein.