10.5: Implications of Market Efficiency Flashcards
What are the key implications of market efficiency for investors?
Market efficiency implies:
Technical analysis is unlikely to consistently generate abnormal returns.
Fundamental analysis may not uncover significantly mispriced securities.
Passive management strategies generally outperform active strategies due to lower costs and fees.
The importance of defining investment objectives based on expected returns and risk levels.
What does Burton Malkiel’s view on index funds suggest?
Burton Malkiel advocates for index funds, suggesting they outperform actively managed funds due to lower costs, reduced trading fees, and tax efficiency.
He argues that passive strategies offer more consistent, average market returns.
How do ETFs contribute to market efficiency?
ETFs contribute to market efficiency by offering low-cost, tax-efficient, and liquid investment options that replicate market indices.
Their growth supports the trend towards passive investing and challenges the efficacy of active management.
What are the main implications of the EMH for corporate officers?
For corporate officers, the EMH suggests:
The timing of securities issuance or repurchase is less critical as prices generally reflect available information.
Monitoring stock prices for new information or overreactions is essential to understand market movements.
What is insider trading, and why is it controversial?
Insider trading involves buying or selling securities based on material, non-public information.
It is controversial because it undermines market fairness and transparency, though some argue it helps prices reflect true value more quickly.
How does insider trading potentially impact market efficiency?
Insider trading might increase market efficiency by enabling prices to reflect information more quickly.
However, it is illegal because it creates an uneven playing field and can erode trust in market integrity.
What are “trading windows” in corporate governance?
Trading windows are specific periods during which corporate insiders are allowed to trade their company’s stock.
These windows aim to prevent insider trading by restricting trades to times when there is less likelihood of possessing material, non-public information.
Why do some argue that insider trading is a victimless crime?
Some argue that insider trading is a victimless crime because it theoretically leads to more accurate stock prices, reflecting all available information, thus promoting market efficiency.
However, it is illegal due to fairness and ethical concerns.
What measures could enhance market efficiency if insider trading were legal?
If insider trading were legal, measures to enhance efficiency might include:
Increased transparency in corporate communications.
More stringent reporting requirements for insider trades.
Safeguards to ensure broad access to the same information.
