lecture 10

Question 1

what is efficientcy

Answer 1

where prices rationally reflect availble information

Question 2

if a market is efficient what happens when there is new information

Answer 2

new information should be incorparated into the share price rapidly and rationally with respect to the direction of the share price movement.

• no chance for a trader to make a return

Question 3

what does effiecency does not mean

Answer 3

prices does not depart from true economic value

investor will not beat the market (some will actually do this, but it should be up to chance)

Question 4

purpose of an efficeint market

Answer 4

1. encourage share buying
2. to give correct signals to company managers
3. help allocate resources

Question 5

what are the 3 levels of efficiency

Answer 5

weak-form

semi-strong form

strong form

Question 6

what is weak form efficiency

Answer 6

Share prices fully reflect all information contained in past price movements

Question 7

what is semi-strong form

Answer 7

Share prices fully reflect all the relevant publicly available information

Question 8

what is strong form

Answer 8

. All relevant information, including that which is privately held, is reflected in the share price

Question 9

what is a weak form test

Answer 9

a simple price chart
- no trading rules based on past movements

• we see a line break-out pattern –> when investors follow past price changes this would often lead to an influx of investment

Question 10

what is the filter approach: weak form test

Answer 10

focus on long term trends

- filter out short term movements

Question 11

what is ‘underreaction’ in terms of investing

Answer 11

investors are slow to react to the release of information

Question 12

what does research say about semi-strong efficiency

Answer 12

there is evidence showing departures from semi-strong –> but for most investors it is seen as efficient

–> there is evidence for semi-strong, but it is possible to outperform the market

Question 13

what is the relationship between strong form test and insider trading

what is ther regulator response to strong from efficiency

Answer 13

strong-form is when someone contains information not publically availble –> most likely information inside information which seen as bad due to its uncompetitive nature

to combat this there were regulatios which Prohibit certain individuals from dealing in the company’s shares for crucial time periods