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FIN 352 – Professor Dow.  Common meaning: Markets always get things right.  Economic: Markets allocate resources to their most efficient uses.  Financial:

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Presentation on theme: "FIN 352 – Professor Dow.  Common meaning: Markets always get things right.  Economic: Markets allocate resources to their most efficient uses.  Financial:"— Presentation transcript:

1 FIN 352 – Professor Dow

2  Common meaning: Markets always get things right.  Economic: Markets allocate resources to their most efficient uses.  Financial: Markets are informationally efficient.

3  Asset prices fully incorporate all available information.  What does all mean?  What does fully mean?

4  How quickly is new information incorporated?  What information is incorporated?  Is information incorporated correctly?  Does extraneous information matter?

5  The government announces that Boeing will get a contract to build tankers.  How quickly does this news get reflected in Boeing’s stock price?  Can you be the first to the market and buy Boeing stock before the price increases?

6  Say that the government announces some information about the contract, provides other information in reports and keeps some other information private.  What information do people pay attention to?  Can you gain by using information that is available and that others ignore?

7  The government releases information about how many planes they intend to buy and at what price.  Do investors correctly forecast how that will affect Boeing’s profitability and price?  Can you do a better job in forecasting?

8  If there wasn’t any new information about Boeing profitability, might investors still change their opinion about Boeing stock?  Could you take advantage of this behavior?

9  If markets get the price right, no point in trying to beat the market

10  Incentives to make money  Paradox: impossibility of perfectly efficient markets.

11  Psychological biases: behavioral finance.  “Markets can remain irrational longer than you can remain solvent”

12  Do investors beat the market in practice?  Luck vs. Skill.  Predictability of stock returns?  Details of tests in next lecture.

13  The market is roughly efficient – stock prices are hard to predict.  The market is not perfectly efficient.  More efficient with some kinds of information than others.  Quickly incorporates new information.  Better at comparing companies rather than determining overall levels.  Irrational exuberance.

14  If you think markets are inefficient,  you should be able to explain what the inefficiency is and why you can take advantage of it.  Otherwise, passive investing is the better strategy.


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