Week 11 - Capital Market Efficiency Flashcards
(6 cards)
1
Q
What does efficiency mean statistically?
A
The least variance or standard deviation of a random variable, e.g return on investment, from its mean
2
Q
What does efficiency mean in the finance context?
A
The state where securities are correctly priced i.e least deviation from their true values
3
Q
What is the capital market like?
A
Mostly efficient - values assets correctly (no mis-pricing)
4
Q
As new information arrives…
A
traders in the market react - prices will move quickly to its new rational level
5
Q
How is capital market efficiency achieved?
A
Through the process of trading
6
Q
What are the factors of the process of trading?
A
- large number of active traders
- information quickly available to all
- large demand pushes prices up
- low demand pushes the prices down
