ADMS 3530 Lecture Notes - Capital Asset Pricing Model, Efficient-Market Hypothesis, Abnormal Return
11 Apr 2013
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Assigned problems are 5, 8, 10, 11, 12, 14, 16, and 22: introduction to market efficiency. Prices in informationally efficient capital or financial markets should reflect all available information. An important consequence of market efficiency is that investments in publicly traded financial securities, such as stocks and bonds, are zero npv investments (as opposed to the assumed positive npvs of most real or productive assets). Investors should expect to earn a fair or normal return that is consistent with the risk (defined by capm or apt) of the security. Companies should expect to receive a fair price when they issue securities. Current prices should represent a fair and unbiased forecast or estimate of the true, intrinsic, or fundamental value of the firm, i. e. , the present value of all future expected cash flows. If this were not the case, we would find many instances where security prices were systematically biased, i. e. , either consistently underpriced or overpriced.
