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1
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Chapter 9
The Efficient Market
Hypothesis
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
2
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Efficient Market Hypothesis (EMH)
• Do security prices reflect information ?
• Why look at market efficiency
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
3
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Random Walk and the EMH
• Random Walk - stock prices are random
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
4
Bodie • Kane • Marcus
Security
Prices
Essentials of Investments
Fourth
Edition
Random Walk with Positive Trend
Time
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
5
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Random Price Changes
• Why are price changes random?
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
6
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
EMH and Competition
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
7
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Forms of the EMH
• Weak
• Semi-strong
• Strong
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
8
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Types of Stock Analysis
• Technical Analysis –
• Fundamental Analysis -
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
9
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Implications of Efficiency for Active or
Passive Management
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
10
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Market Efficiency and Portfolio
Management
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
11
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Empirical Tests of Market Efficiency
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
12
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
How Tests Are Structured
1. Examine prices and returns over time
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
Bodie • Kane • Marcus
13
Essentials of Investments
Fourth
Edition
Returns Surrounding the Event
-t
Irwin / McGraw-Hill
0
+t
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
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Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
How Tests Are Structured (cont.)
2. Returns are adjusted to determine if
they are abnormal
-t
Irwin / McGraw-Hill
0
+t
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
15
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Issues in Examining the Results
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
16
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
What Does the Evidence
Show?
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
17
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Anomalies
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
18
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Mutual Fund and Professional
Manager Performance
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.