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Homework answers / question archive / Asset prices react almost immediately to new public information and the reaction is not systematically biased, that is there is not over or under reaction on average Asset prices react almost immediately to new public information and to new private information Asset prices follow a random walk, so investors cannot predict future stock prices based on historical information about prices and returns Technical Analysis Fundamental/ Quantitative Analysis Efficient Market Hypothesis Skeptics of the EMH argue that the stock market is competitive but not always efficient with respect to public information- why? Provide a discussion of the role of financial statement analysis in an efficient capital market and reasons why financial statement analysis is still valuable A company in the growth phase of its product life cycle will normally have the following pattern of cash flows a
Semi strong form
Strong form
Weak form
The use of trends in historical market data (price and volume in an attempt to forecast future price movements
Investors who use technical analysis believe that history often repeats itself, and this repetition represents an exploitable opportunity
The process of using historical information (financial statements, growth trends, economic conditions, competition levels) in an attempt to forecast future performance, use those forecasts to estimate intrinsic or fundamental value, and compare intrinsic value to the current price to make trading decisions- buy, sell, hold
Markets process information efficiently, such that investors cannot earn returns that exceed average market returns on a risk adjusted basis
Information processing costs
Investor irrationality
Transaction costs
Short sale constraints
Even if markets are perfectly efficient, someone must do the analysis to bring about appropriate prices
A finding that the market is efficient on average does not prevent temporary mispricing of securities, analysis can identify specific mispriced securities
Research has shown that equity markets are not perfectly efficient, financial analysis has uncovered anomalies
Financial analysis can adjust financial statements for the biases related to managers preference of job security and compensation
Financial analysis is valuable outside to the equity capital markets
B. negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing
c. maturity
