Question

In: Finance

What does it mean to be market efficient? What is the link between perfect markets and...

  1. What does it mean to be market efficient? What is the link between perfect markets and efficient markets? You see that the price of IBM is such that you expect it to earn 20% over the next year. Can you conclude that the market is inefficient?
  2. What types of markets are more likely to be inefficient?
  3. Given that a stock price is the PV of the firm’s cash flow, discuss the positions taken by a true believer, firm believer, mild believer and non-believer of the EMT ---- in terms of what/how they believe an investor can exploit the market.
  4. How does risk (standard deviation) grows with the holding period in a random walk?

Note: EMT is efficient market theory.

Solutions

Expert Solution

SOLUTION:-

Market efficiency refers to the degree to which market prices reflect all available, relevant information.

* The Efficient market hypothesis is a theory in financial economics that states that asset prices fully reflect all the available information.

* A perfect market is one in which there are never any arbitrage opportunities because assets are priced with total efficiency. And in an efficient market all the relevant, efficient information is reflected through the market prices.

* Yes, the market will be inefficient because the statement that the price of IBM is such that 20% increase is expected, does not give much information about the asset's true value, does not provide the public with information.

* The markets in which the asset market prices do not reflect the true value are inefficient markets.

* A true believer has faith in the strong form version of Efficient Market Hypothesis (EMH), he believes that the current stock prices account   all the public and non public information, and that investors cannot make returns on investment exceed normal markets returns, regardless of information retrieved and reserch done.

* A firm believer has fiath in the semi-strong version of EMH, that all the public information is accounted for calculation of stock's current price, investors cannot use technical or fundamental analysis to gain higher returns in market.

* A mild believer has faith in the weak form of EMH, it suggests that today's stock prices reflect all the data of past prices and that no form of technical analysis can be effectively used by investors to make decisions.

Risk reduces with growth in holding period

THANK YOU, if any queries please leave your valuable comment on comment box...........

If possible then rate the answer as well


Related Solutions

What does it mean to be market efficient? What is the link between perfect markets and...
What does it mean to be market efficient? What is the link between perfect markets and efficient markets? You see that the price of IBM is such that you expect it to earn 20% over the next year. Can you conclude that the market is inefficient? What types of markets are more likely to be inefficient? Given that a stock price is the PV of the firm’s cash flow, discuss the positions taken by a true believer, firm believer, mild...
What does it mean that the stock market is efficient? What makes the stock market efficient?
What does it mean that the stock market is efficient? What makes the stock market efficient?
What does the efficient market mean? how is it achieved?
What does the efficient market mean? how is it achieved?
What does it mean to say that markets are socially efficient? How does this relate to policy?
What does it mean to say that markets are socially efficient? How does this relate to policy?
What are some of the key theories that link accounting with the notion of efficient markets?...
What are some of the key theories that link accounting with the notion of efficient markets? What do these theories find and what are the assumptions that underpin their methods? (1,000words essay question)
What do economists mean when they say markets are 'efficient'? Are global markets efficient?
What do economists mean when they say markets are 'efficient'? Are global markets efficient?
What does it mean to say that markets promote an efficient outcome for society? Explain the...
What does it mean to say that markets promote an efficient outcome for society? Explain the ways or mechanisms by which markets can promote efficiency.
Suppose that capital markets are perfect, meaning that they are complete, efficient and there are no...
Suppose that capital markets are perfect, meaning that they are complete, efficient and there are no frictions such as taxes. AH Belo Corp currently is 100% equity financed, with a market capitalization of $1 billion but has decided to add some debt to its capital structure. It will do so by raising $100 million in debt and using the proceeds to repurchase shares. Which of the following accurately describes the effect of this policy change on the company's stock price?...
what does it mean to say that the stock market is "efficient" in its pricing? identify...
what does it mean to say that the stock market is "efficient" in its pricing? identify and explain the three different levels of market efficiency
what does it mean for financial market to be considered (a) informationally efficient and (b) economically...
what does it mean for financial market to be considered (a) informationally efficient and (b) economically efficient?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT