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17 Dec 2010
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Lecture 03
The Demand for Financial Markets & the International Monetar y System
Theorizing Financial Markets
Will investors make more money than the average investor?
Most information is cont ained in the price of a stock
oTry to f igure out the future stock pr ice anticipate future infor mation (only new
infor mation will alter the pr ice of the stock)
Random Walk model only some for m of error can be used to determine future stock
pr ices
oCannot use past pr ices to determine future pr ices
Markets are eff icient because they absorb all cur rent infor mation into the stock pr ice
Several different conditions of eff iciency:
oWeak versus strong efficiency
oWeak eff iciency stock prices incor porate past pr ices
oSemi-strong past prices + analyst reports
oStrong Eff iciency ALL infor mation; public and private information
There are no arbitrage opportunities profit can be made without taking a r isk (not
possible)
Very diff icult for fund managers to make more money than the average investor
Historical Prices + Public Private Information = Information
Buy/Sell/Hold + Issue = Decisions
Determine Market Price = Demand/Supply
Essentially your basic supply/demand graph [Shift up or shif t down of S or D cur ve]
Market Capitalization total number of shares a firm offers to the public market
Short-run momentum
Negative cor relation
Underestimate the occurance
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