Types of market efficiency The weak-form of efficiency: price accurately reflect all information that can be derived by examining market trading data such as past prices, trading volume, short interest rate, etc
INVESTMENTS Two-Security Portfolio: Return rp =W+W2r2 W Proportion of funds in Security 1 W2 Proportion of funds in Security 2 =Expected return on Security 1
Fourth Edition Advantages of the Single Index Model Reduces the number of inputs for diversification. Portfolio of 50 assets 50 expected returns;50 variances 1225 covariance. too difficult a task
INVESTMENTS Fourth Edition Efficient Market Hypothesis (EMHD Do security prices reflect information Why look at market efficiency Implications for business and corporate finance Implications for investment
Consumption-Based Model and Basic Pricing model Basic question to decide for an investor: (1) how much to save; (2)how much to consume; (3)what portfolio of assets to hold. Pricing equation come from the first order condition for this decision
Predictions and applications CAPM: in market equilibrium, investors are only rewarded for bearing the market risk; APT: in the absence of arbitrage, investors are only rewarded for bearing the factor risk Applications: ---professional portfolio managers: evaluating security returns and
Discount model is in terms of conditional moments The first order condition is,u'( BE, [u'(c )x 1] The expectation is conditional expectation on investor's time t information; The basic pricing equation is P, =E, (m +1X1+)
