Professional Documents
Culture Documents
AGENDA
Syllabus and course plan A warm-up contest Course framework Market efficiency
Find your group ASAP; Rank your choice of Case 4 in-class group cases. Note confliction, if Case 5 there is any.
CONTEST
This is a contest. The winner of this contest will receive a Gift (ties are broken by lottery). Rule: Pick a number (an integer) between 0 and 100, inclusive. The person whose number is closest to 2/3 of the average number for the class is the winner. We will check the results towards the end of the class. Name: My pick is:
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Pick up the most beautiful (popular) faces It is not a case of choosing those [faces] that, to the best of ones judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. (Keynes, General Theory of Employment Interest and Money, 1936).
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Savings
Information Intermediaries
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Accounting Analysis
Financial Analysis
Prospective Analysis
Cost of Capital
Intrinsic Value
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WHAT IS EMH?
Fama (1970): Security prices always fully reflect the available information.
In past price (weak) In public domain (semi-strong) Both public and private (strong)
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Perfectly efficient markets would make it impossible to identify mispriced stocks using public information. If markets are extremely efficient, the few who receive newly announced financial information could trade advantageously on it before it is fully disseminated to the rest of the market.
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Stock prices are hard to predict Stock prices adjust quickly to new information Stock prices do not react to noninformation No one consistently outperforms the market:
There
is no consistent evidence that actively managed mutual funds produce superior returns for investors.
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In the four years since Mr. Monk, wearing an NFL shirt in support of the Bears, has chaired and inspired the Sun-Times stock-picking contest, his stocks have posted annual returns that beat the major indexes each time. (Rich Hein/Sun-Times)
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Investors are rational Some investors are irrational, but their biases can go both directions and their trades cancel out Some systematic irrationality, but it is eliminated by rational arbitrageurs
Investors could be biased in a systematic manner. The faith is in the process of arbitrage. But the faith may not be well founded. 16
It requires sufficient mispricing to function properly. Arbitrage and mispricing must co-exist. (Lee, JAE, 2001)
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Returns predictability
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