1 / 30

CHAPTER FOUR

CHAPTER FOUR. EFFICIENT MARKETS, INVESTMENT VALUE AND MARKET PRICE. DEMAND AND SUPPLY. HOW IS THE DEMAND FOR SECURITIES DETERMINED? Definition : the demand for a security is a schedule of prices and quantities demanded by investors at all possible prices.

gwen
Download Presentation

CHAPTER FOUR

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER FOUR EFFICIENT MARKETS, INVESTMENT VALUE AND MARKET PRICE

  2. DEMAND AND SUPPLY • HOW IS THE DEMAND FOR SECURITIES DETERMINED? • Definition:the demand for a security is a schedule of prices and quantities demanded by investors at all possible prices. • the demand is determined by summing the individual schedules for all investors in the market

  3. DEMAND AND SUPPLY • DEMAND SCHEDULES: • When all demand schedules in the market are combined, the result is an aggregate table of prices and quantities demanded. • When graphed, the curve slopes from the upper left to the lower right.

  4. The Market Demand Schedule for IBM Stock D

  5. DEMAND AND SUPPLY • HOW IS THE SUPPLY OF SECURITIES DETERMINED? • Individual brokers hold a collection of market orders to sell at all possible prices • In combining the market orders, the resulting market supply graph curves upward and to the right

  6. The Market Supply Schedule for IBM Stock

  7. DEMAND AND SUPPLY • THE INTERACTION OF SUPPLY AND DEMAND: • The Market opens: • an open outcry system begins as • the clerk calls out the prices for IBM • if no buyer, clerk goes to next lower price • if no seller, clerk raises price • prices are called until the quantity demanded equals the quantity supplied at the “right price.”

  8. How Market Price Is Determined for IBM Stock S D

  9. DEMAND AND SUPPLY • SHIFTS IN SUPPLY AND DEMAND: • What may cause a change in demand? • more optimistic (pessimistic) investors enter the market • investors income may change • the supply or demand for a complementary product for the stock changes

  10. DEMAND AND SUPPLY • SHIFTS IN SUPPLY AND DEMAND: • What may cause a shift in supply? • the profitability of IBM changes • the management of the firm changes • the costs of the firm change

  11. MARKET EFFICIENCY • WHAT IS AN EFFICIENT MARKET? • It is allocationallyefficient when it distributes funds to the most promising investments

  12. MARKET EFFICIENCY • Informationally (externally) efficient • distributes information quickly and widely • prices adjust rapidly in an unbiased manner

  13. MARKET EFFICIENCY • Operationally (internally) efficient • brokers and dealers compete fairly • low transaction costs • high speed transactions

  14. MARKET EFFICIENCY • THE EFFICIENT MARKET MODEL: • Concerned with Informational Efficiency • Also known as: • Efficient Market Theory (EMT) • Efficient Market Hypothesis (EMH)

  15. MARKET EFFICIENCY • THE EFFICIENT MARKET MODEL: • Assumptions: • costless access to available information • capable analysis skills by participants • close attention to market prices which adjust appropriately

  16. MARKET EFFICIENCY • THE EFFICIENT MARKET MODEL: • Investment Value • the present value of the security’s future returns as estimated by informed investors • a market is said to be efficient when the investment value equals the market value at all times

  17. MARKET EFFICIENCY

  18. THE FAMA MARKET MODEL • THE FAMA MARKET MODEL (EQUATION)

  19. THE FAMA MARKET MODEL • In words - • The expected price for any security E(r) • at the end of the period (t+1) • is based on the security’s expected normal rate of return during that period E(rj,t+1) • given the information set at time t (F)

  20. THE FAMA MARKET MODEL • E(rj,t+1) is determined by • the information set available to investors at the start of period

  21. THE FAMA MARKET MODEL • Implication: • if markets are perfectly efficient, investors cannot earn abnormal returns based on the information set because where xj,t+1 is the difference in price at t+1 between what is the price and what investors expect

  22. THE FAMA MARKET MODEL • Implication: • In an efficient market • there will be no expected under- or overvaluation of securities based on the available information set

  23. THE FAMA MARKET MODEL • SECURITY PRICE CHANGES ARE A RANDOM WALK • What happens when new information arrives changing ft?

  24. THE FAMA MARKET MODEL • In an efficient market the new information is incorporated into prices immediately. • positive and negative information are as equally probable • if temporary inefficiencies cause mispricing, investors seeking profit opportunities eliminate the opportunities

  25. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • Investors will make a fair return but no more on their investments

  26. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • by searching for inefficiencies, investors ensure market efficiency

  27. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • publicly known investment strategies cannot generate abnormal returns

  28. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • some investors will display impressive performance records

  29. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • professional investors should fare no better than ordinary investors when selecting securities

  30. THE FAMA MARKET MODEL • SUMMARY OBSERVATIONS ABOUT EFFICIENT MARKETS: • past performance is not an indicator of future performance

More Related