AFM 273 Textbook Notes & Economic Indicators (Some)

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Department
Accounting & Financial Management
Course
AFM 273
Professor
Andrew Ecclestone
Semester
Fall

Description
Chapter 13 Investor Behaviour and Capital Market EfficiencyNovember 19 20131130 AM131 Competition and Capital MarketsIdentifying a Stocks AlphaFigure 131 p445if market portfolioefficient portfolio market not in CAPM equilibriumPossibility news is announced that some stocks expected returnsome stocks expected returnsWith new information market portfolio no longer efficientAlternative portfolios offer a expected returnvolatility than we can obtain by holding the market portfolioInvestors alter their investments in order to make their portfolios efficientTo improve performance of portfolios investors who are holding the market portfolio will compare the expected return of each security s w its required return from CAPMr rER rsfsMktfFigure 132 p445market portfolio not efficient stocks will not lie on SMLImprove upon market portfolio by buying stocks withselling stocks with Result prices chgshrink towards 0 move toward SMLAlphadifference bw stocks expected returnits required return according to SML ER rsssMarket portfolio is efficientall stocks on SML 0 Profiting from NonZero Alpha StocksAs stock prices change so do expected returns stocks total returndividend yieldcapital gain rateAll else being equal in current stock price stocks div yieldfuture capital gain rateexpected returnInvestors trade to improve their portfolios priceexpected return of stockspriceexpected return of stocks until the stocks are once again on the SMLthe market portfolio is efficientActions of investors have 2 important consequencesCAPM conclusion that market is always efficient not truecompetition among investors who 1try to beat the marketearn a should keep the market portfolio close to efficient much of the time CAPMapproximate description of competitive marketMay exist trading strategies that take advantage of nonzero stockscan beat the market2132 Information and Rational ExpectationsInfo that altered stock is publicly announcedlargeof investors who receive newsactnobody wants to sell at old priceslarge order imbalanceonly way to remove imbalance is for price to 0Possible for new prices to occur wotrade intense competition bw investorsprices move before any investor can actually trade at old pricesno investor profits from newsInformed Versus Uninformed InvestorsIn order to profit by buying a stock there must be someone willing to sell itHomogeneous expectationsinvestors have same infoinvestors know about stock but no desire to sell Merely CAPM assumption reality investors have different infoQuality of investors info not necessarily enough to generate trade in situationConclusion of CAPM investors hold market portfolio w riskfree investmentsinvestment advicedoes not depend on quality of an investors info or trading skillsophisticated investors have an adv over nave investorsExample 131 p447hold market portfolio to make same return as avg investor OR holdAFM 273 Page 1
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