fina312 chapter 11.ppt
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fina312 chapter 11.ppt

fina312chapter11.ppt

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CHAPTER11MauriceKendall(1953)foundnopredictablepatterninstockprices.Pricesareaslikelytogoupastogodownonanyparticularday.Howdoweexplainrandomstockpricechanges?EfficientMarketHypothesis(EMH)EfficientMarketHypothesis(EMH)Figure11.1CumulativeAbnormalReturnsBeforeTakeoverAttempts:TargetCompaniesFigure11.2StockPriceReactiontoCNBCReportsInformation:ThemostpreciouscommodityonWallStreetStrongcompetitionassurespricesreflectinformation.Information-gatheringismotivatedbydesireforhigherinvestmentreturns.Themarginalreturnonresearchactivitymaybesosmallthatonlymanagersofthelargestportfolioswillfindthemworthpursuing.WeakSemi-strongStrongTechnicalAnalysis-usingpricesandvolumeinformationtopredictfuturepricesSuccessdependsonasluggishresponseofstockpricestofundamentalsupply-and-demandfactors.WeakformefficiencyRelativestrengthResistancelevelsTypesofStockAnalysisActiveManagementAnexpensivestrategySuitableonlyforverylargeportfoliosPassiveManagement:NoattempttooutsmartthemarketAcceptEMHIndexFundsandETFsVerylowcostsEvenifthemarketisefficientaroleexistsforportfoliomanagement:DiversificationAppropriaterisklevelTaxconsiderationsResourceAllocationEmpiricalfinancialresearchenablesustoassesstheimpactofaparticulareventonafirm’sstockprice.Theabnormalreturnduetotheeventisthedifferencebetweenthestock’sactualreturnandaproxyforthestock’sreturnintheabsenceoftheevent.Returnsareadjustedtodetermineiftheyareabnormal.MarketModelapproach:a.rt=a+brmt+et(ExpectedReturn)b.ExcessReturn=(Actual-Expected)et=rt-(a+brMt)MagnitudeIssueOnlymanagersoflargeportfolioscanearnenoughtradingprofitstomaketheexploitationofminormispricingworththeeffort.SelectionBiasIssueOnlyunsuccessfulinvestmentschemesaremadepublic;goodschemesremainprivate.LuckyEventIssueWeak-FormTestsPredictorsofBroadMarketReturnsP/EEffectSmallFirmEffect(JanuaryEffect)NeglectedFirmEffectandLiquidityEffectsBook-to-MarketRatiosPost-EarningsAnnouncementPriceDriftFigure11.3AverageAnnualReturnfor10Size-BasedPortfolios,192