Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Sixth Edition by Frank K. Reilly & Keith C. Brown Chapter 7.

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Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Sixth Edition by Frank K. Reilly & Keith C. Brown Chapter 7 Version 1.2 Copyright © 2000 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department Harcourt, Inc. 6277 Sea Harbor Drive Orlando, Florida 32887-6777

Efficient Capital Markets In an efficient capital market, security prices adjust rapidly to the arrival of new information, therefore the current prices of securities reflect all information about the security Whether markets are efficient has been extensively researched and remains controversial Copyright © 2000 by Harcourt, Inc. All rights reserved.

Why Should Capital Markets Be Efficient? The premises of an efficient market A large number of competing profit-maximizing participants analyze and value securities, each independently of the others New information regarding securities comes to the market in a random fashion Profit-maximizing investors adjust security prices rapidly to reflect the effect of new information Conclusion: the expected returns implicit in the current price of a security should reflect its risk Copyright © 2000 by Harcourt, Inc. All rights reserved.

Alternative Efficient Market Hypotheses Weak-form EMH Semi strong-form EMH Strong-form EMH Copyright © 2000 by Harcourt, Inc. All rights reserved.

Copyright © 2000 by Harcourt, Inc. All rights reserved. Weak-Form EMH Current prices reflect all security-market information, including the historical sequence of prices, rates of return, trading volume data, and other market-generated information This implies that past rates of return and other market data should have no relationship with future rates of return Copyright © 2000 by Harcourt, Inc. All rights reserved.

Copyright © 2000 by Harcourt, Inc. All rights reserved. Semistrong-Form EMH Current security prices reflect all public information, including market and non-market information This implies that decisions made on new information after it is public should not lead to above-average risk-adjusted profits from those transactions Copyright © 2000 by Harcourt, Inc. All rights reserved.

Copyright © 2000 by Harcourt, Inc. All rights reserved. Strong-Form EMH Stock prices fully reflect all information from public and private sources This implies that no group of investors should be able to consistently derive above-average risk-adjusted rates of return This assumes perfect markets in which all information is cost-free and available to everyone at the same time Copyright © 2000 by Harcourt, Inc. All rights reserved.

Copyright © 2000 by Harcourt, Inc. All rights reserved. Thank You Please visit www.shadbd.weebly.com for softcopy of the lecture and go through the text book Ch-7 for details. Copyright © 2000 by Harcourt, Inc. All rights reserved.