ADMS 3531 Chapter Notes - Chapter 8: Technical Analysis, S&P 500 Index, Starbucks

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pucewildebeest131

24 Feb 2014

School

York University

Department

Administrative Studies

Course

ADMS 3531

Professor

Dale Domian

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Document Summary

Chapter 8: stock price behaviour and market efficiency. Efficient markets hypothesis (emh) the hypothesis stating that, as a practical matter, investors cannot consistently beat the market". A theory that asserts: as a practical matter, the major financial markets reflect all relevant information at a given time. Market efficiency research examines the relationship between stock prices and available information: the important research question:is it possible for investors to beat the market? . Prediction of the emh theory: if a market is efficient, it is not possible to beat the market (except by luck) The excess return on an investment is the return in excess of that earned by other investments that have the same risk. Beating the market means consistently earning a positive excess return. An investment has outperformed other investments of the same risk. Three economic forces can lead to market efficiency: investor rationality independent deviations from rationality. Investors use their information in a rational manner.

Related Questions

The efficient market hypothesis (EMH) holds that all securities are priced rationally in the market, that is, that prices fully reflect all available information. Because all information is contained in stock prices it is impossible to beat the market over time without taking on excess risk. Support or criticize the concept that markets are efficient.

2. Do prices in the stock market reflect all public information? Does everyone have access to this 'public' information? Is there a cost of acquiring this 'public' information? Why or why not?

3. Are there market imperfections? If so, discuss the possible causes of persisting market imperfections. If not, why not?

Please write a 250 word response to the below discussion. Please provide 2 scholarly sources.

The efficient market hypothesis states that share prices reflect all relevant information, and that it is impossible to beat the market or achieve above-average returns on a sustainable basis. There are many critics of this theory, such as behavioral economists, who believe in inherent market inefficiencies. The Efficient Market Hypothesis (EMH) states that securities are very efficient in reflecting the truth about a stock. In other words, when new information is available about a stock, it is incorporated into the price adjustments of the stock quickly enough to reflect the actual state of the market (Malkiel, 2003). EHM debunks the idea that financial analysis and forecasting are useful tools to shop for stocks. In other words, because securities accurately reflect the status of that stock, it is not possible to use financial analysis to find an undervalued stock or predict trends in the market in order to buy low with the future insight to sell high. There are three levels, or degrees, of the efficient market hypothesis: weak, semi-strong, and strong. The weak form assumes that current stock prices reflect all available information, and that past price performance has no relationship with the future. In other words, this form of the hypothesis says that using technical analysis to achieve exceptional returns is impossible. The semi-strong form says that stock prices have factored in all available public information. Because of this, it's impossible to use fundamental analysis to choose stocks that will beat the market's returns. Finally, the strong form of the efficient market hypothesis says that all information, public as well as private, is incorporated into current stock prices. This form of the efficient market hypothesis essentially assumes a perfect market, and isn't plausible when there are insider trading restrictions (VanBergen, 2011). Yes, I believe that financial statement analysis can provide a significant advantage to an investor. The key is that empirical analysis, specifically statistical models aimed at forecasting future trends based on historical data, are simply another tool to be taken in to account. They are not a single source of the definitive answer. But, through the use of high power computing and mathematically rigorous modeling tools, forecasting is a powerful tool to provide additional insight to decision makers to include the financial industry. In support of my position, (Malkiel 2003) reports the findings of several empirical studies which demonstrate positive statistical correlations in short-run return analysis and the successful prediction of up to 40% of variation in long-term return analysis through time-series statistical models, which are able to take into account seasonal fluctuations (Malkiel 2003). One experimental study demonstrated with statistical significance that the Ohlson model provides predictive ability for future stock price movements (Lee, Chen and Tsai, 2014).

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ADMS 3531 Chapter Notes - Chapter 8: Technical Analysis, S&P 500 Index, Starbucks

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