Lecture 6: Flashcards
(5 cards)
1
Q
Why do share prices change?
A
To reflect new information about the company
2
Q
What is informational efficiency (IE)?
A
The degree at which the stock/market prices change to reflect available information to investors
3
Q
What are the implications of IE?
A
- Prices are the best indicators of value (pruce represents fundamentals)
- Active traders (those who buy and sell shares often) perform no better than passive investors
- Uninformed investors can expect a fair return
4
Q
What are the implications of informational inefficiency?
A
- Share prices that are too high in comparison on their value need to be corrected (overreaction)
- Share prices that are too low in comparison to their value need to be corrected (underreaction)
- We can earn returns above the level required to compensate for risk
- Unexpected price changes are nonrandom
5
Q
Why does informational efficiency mean random price changes?
A
IE prices change randomly due to new information
Unexpected price changes therefore must be random
