1. Chapter 12 Efficient Markets: Theory And Evidence

2. Efficient Market Assumptions
Large number of analysts assessing
The true value of the firm
Analysts look for mispriced securities
Buy or sell them
Driving the market price towards true value
Competition pushes prices to true value
Stock prices reflect new information

3. Is The Market Efficient?
Requires Testing for Market Efficiency
Requires Identifying the Appropriate Information
Efficient Market Theory (EMT)
Describes the impact of information on price

4. Forms Of EMT Weak Form Technical Analysis
Prices reflect all historical information
Price changes follow a random walk
Semi-Strong Form Fundamental Analysis
Prices reflect all public information
Strong Form Insider Trading
Prices reflect all public and private information

5. Resources Allocation Stock Prices Reflects Firm’s Prospects
Acquire Information
Low cost and high speed
Focus on Trading Cost and Speed
New Information is Worthless
Price of stock is instantaneously adjusted to reflect new information
92% of Returns Depend on Allocation

6. 5 Rules For Smart Asset Allocation
Identify Your Time Horizon
Assess Your Risk Tolerance
Diversify, Diversify, Diversify
Don’t Tinker With Your Mix
Re-Balance Your Holdings Once a Year

7. Is There A Contradiction Between EMT and Portfolio Selection?
Yes
Yes

8. Passive Investment Strategy
Adhering to desired investment proportion
Index funds do not change
Active Investment Strategy
Change investment proportion according to market prediction

9. Strategy In Inefficient Markets
Fundamental Analysis
Believe in weak form EMT
Fundamental and Technical Analysis
Believe market is inefficient
No Strategy
Believe in strong form EMT

10. Fama’s Classification For EMT
Tests for Return Predictability
Event Studies
Test for Private Information

11. Testing Weak Form EMT
Analysis of Technical Trading Rules of Abnormal Rates of Return
Statistical Tests on Historical Data for Significant Patterns

12. Testing For Semi-Strong Form EMT
Can Fundamental Analysis Earn Abnormal Returns?
Surprise Factor
Connecting Theory To Practice 12.3

13. Testing Strong Form EMT
Insiders Can Generate Abnormal Profits
Illegal
Strong Form Is Not Supported
Getting the Information FIRST
Before the market reacts

14. Market Anomalies
Firm
Seasonal
Event
Accounting

15. Firm Anomalies Size Closed-End Mutual Funds Neglect
Institutional Holdings

16. Seasonal Anomalies
Week-End
Time of Day
End of Month
Seasonal
Holidays

17. Event Anomalies Analysis’ Recommendations Insider Trading Listing
Value Line Rating Change

18. Accounting Anomalies P/E Ratio Earnings Surprises Price/Sales Ratio
Price/Book Ratio
Dividend Yield
Earnings Momentum