FINANCIAL MARKET

Financial Market Assignment



Financial Market Assignment

Question 1: What is the Efficient Market? Give some evidence on most current market to use Efficient

It is said that a stock market is efficient when the dynamics of the market leads to rapidly balance the yields and risks of different securities or portfolios of securities. For an efficient market must meet three conditions: that the goods exchange is standardized and homogeneous, there are many participants (buyers and sellers) and is relatively easy to enter and exit the market. In short, a market is efficient when all the relevant information is available to investors and securities prices reflect this information.

Market in which prices reflect transactions defined in a high level of competition between participants and the efficient use of all available information.

Evidence of Efficient Market

A stock market is efficient when the competition between different actors (investors) involved in it, guided by the principle of maximum profit, leads to equilibrium situations in which at all times the price of any asset (shares, obligations, public funds, etc.) provides a good estimate of its intrinsic value. From the perspective of the modern theory of portfolio selection and balance in the capital market, the stock market is efficient when the dynamics of the market itself leads immediately to a situation in which they balance the risks and returns of different assets that are traded on the same (individual assets or portfolios). This second definition of efficient market is increasingly being used more frequently. The efficient market theory was developed in parallel with the theory of equilibrium in the capital market, even in the time ahead, hence the divorce between a methodology and a theory.

Question 2: Distinguish between different forms of market efficiency and have to give examples to illustrate your answer.



There are three ways or levels of efficiency that can be seen in an efficient stock market:

The weak form,

The intermediate form, and

Strong form

Weak Efficiency

This requires that information is factored out of the recent market developments. The current price would be best estimator of future prices and no effective prediction by chart analysis possible. In the application of the weak hypothesis follows directly that by Technical analysis can generate excess returns are not.

Moderate efficiency

This requires that all public information is fully priced. Fundamental analysis would therefore be meaningless. Should it be fulfilled, may the public disclosure of basic information not reflected in the course. In the application of moderate hypothesis follows directly that can be earned by any fundamental analysis, excess returns, fundamental analysis should be disseminated efficiently by the market participants. In the days of the Internet, this should increasingly be the case. The information is then already known to all participants and thus worthless.

Strong Efficiency

This requires that all public and private information is already priced. The fact that insider trading takes place and, at least in the short term is worth, speaks against this hypothesis is still not excluded that insider information is at least partly priced in ...