EMH and value of debt Flashcards
Why are share valuation techniques used?
To identify mispriced shares and make a capital profit on their purchase and sale. However, consistently beating the market is very difficult, even for professionals.
What defines an efficient market?
An efficient market quickly and accurately prices securities based on all relevant information, assuming:
Cheap and simultaneous access to information for all investors
Free trade
No transaction costs or taxes
What are the three levels of stock market efficiency?
Weak Form Efficiency
Semi-Strong Form Efficiency
Strong Form Efficiency
What does Weak Form Efficiency suggest?
Share prices reflect all historical price information. No above-average returns can be earned using trading rules based on historical prices or patterns, as prices follow a random walk influenced only by new, unpredictable information.
What does Semi-Strong Form Efficiency suggest?
Share prices reflect all publicly available information. Fundamental analysis (using public data to identify mispriced shares) cannot consistently generate above-average returns due to the rapid adjustment of prices to new information.
What does Strong Form Efficiency suggest?
Share prices reflect all information, including private and insider knowledge. No investor can consistently outperform the market using any information. However, strong-form efficiency is unrealistic, as insider trading (illegal) can still yield abnormal gains.
What is insider trading, and how does it relate to market efficiency?
Insider trading involves using unpublished private information to gain abnormal profits. While illegal, its existence indicates that markets are not fully strong-form efficient.
How does market efficiency affect speculative profit opportunities?
The more efficient the market, the less opportunity there is for speculative profit. In a strong-form efficient market, outperforming the market becomes impossible.
How does market efficiency affect business decisions?
In efficient markets, share prices reflect a business’s prospects, making timing of share issues or investor promotion less critical.
How do the levels of EMH differ in terms of reflected information and market-beating strategies?
Weak Form: Reflects past price movements; can’t beat the market with historical data.
Semi-Strong Form: Reflects public information; can’t beat the market with public data.
Strong Form: Reflects public and private information; can’t beat the market at all.
What factors influence share price?
Share price is influenced by public and private information, market sentiment, economic conditions, and company performance, among other factors.
