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A. B. C. D. 3.: Uses

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Kyllua Theoty Entendez Desoloc
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40 views

A. B. C. D. 3.: Uses

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Kyllua Theoty Entendez Desoloc
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© © All Rights Reserved
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CHAPTER 5: Security Market Indexes

USES:
The primary uses of market indices are to
(1) gauge market sentiments
(2) serve as proxies for measuring returns and risk
(3) serve as proxies for asset classes
(4) benchmark active managers and
(5) model portfolios for index funds and exchange-traded funds.
FACTORS IN CONSTRUCTING MARKET INDEXES
1. The Sample- used to construct an index
2. Weighting Sample Members
a. A price-weighted index
b. A market value-weighted index
c. An unweighted index
d. A fundamental weighted index
3. Computational Procedure
STOCK MARKET INDEXES

Chapter 6: EFFICIENT CAPITAL MARKETS

An efficient capital market is one in which security prices adjust rapidly to the new arrival of new information, and, therefore, the
current prices of securities reflect all information about security.

6.1 Why should capital markets be efficient?

In an efficient capital market, security prices adjust rapidly to the infusion of new information, and therefore, current security prices
fully reflect all available information. To be absolutely correct, this is referred to as an INFORMATIONALLY EFFICIENT MARKET.
Although the idea of an efficient capital market is relatively straightforward, we often fail to consider why capital markets should be
efficient. What set of assumptions imply an efficient capital market?
1. An initial important premise of an efficient market requires that a large number of profit maximizing participants analyse and
value securities, each independently of the others.
2. A second assumption is that new information regarding securities comes to the market in a random fashion, and the timing of
one announcement us generally independent of others.
3. The third assumption is especially crucial. The buy and sell decisions of all those profit maximizing investors cause security
prices to adjust rapidly to reflect the effect of new information.
Although the price adjustment may be imperfect. It is unbiased. This means that sometimes the market will over adjust and other
times it will under adjust. But you cannot predict which will occur at any given time. Security prices adjust rapidly because the many
profit-maximizing investors are competing against one another to profit from the new information.

6.2 alternative efficient market hypotheses


Fama presented the efficient market theory in terms of a fair game model, contending the investors can be confident that a current
market price full reflects all available information about a security and therefore the expected return based upon this price is
consistent with its risk.

Three subhypotheses:
a. Weak form EMH- assumes that current stock prices fully reflect all security market information including the historical
sequence of prices, rates of return, trading volume data and other market generated information.
b. Semi strong form efficient market hypothesis – asserts that security prices adjust rapidly to the rlease of all public
information, that is, current security prices full reflect all public information.
c. Strong form efficient hypothesis – contends that stock prices fully reflect all information from public and private sources. This
means that no group of investors has monopolistic access to information relevant to the formation of prices.

Results of Simulations of specific trading rules – one of the most popular trading techniques is the filter rule, wherein an investor
trades a stock when the price change exceeds a filter value set for it.

Adjustment for Market Effects – for any of those test, you need to adjust the securities rates of return for the rates of the return of the
overall market during the period considered.

Alternate semistrong test – given this understanding of the market adjustment, recall that there are two sets of the semi strong form
EMH, the first set are referred to as return prediction studies, another would be event studies.

Quarterly earnings report – studies that address quarterly reports are considered part of the times series analysis.
January Anomaly – related to aggregate market returns where in it is contended that stock markets return in January are a predicter
to the return of the next 11 months of the year.

Other calendar effects – monthly effect, weekend/dayoff of the week effect and intraday effect.

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