Efficient Market
what would investors do if the: -asset was underpriced? -asset was overpriced?
-buy, pushing up the price -sell, pushing down the price
conditions of: -rate of return -present value
-expected rate of return= market interest rate -asset price= pv of current and expected future payments
what must expectations take into account -examples -should the asset price reflect this?
all readily information: newspapers, business financial data, government stats, internet information -yes
what is the alternative view state that the asset market is not efficient? -in this case does opportunities for economic profit exist?
assets are misplaced- over/ under -yes
in an efficient market when does the present value and rate of return conditions hold?
at every moment
what is the profit in the efficient market based on?
excess of opportunity cost
in an asset market why is more at stake? -what is there more incentive to do?
gain/ lose thousands of dollars -seek out and take advantage of mispricing- a lot of competition
when is the asset considered efficient
if the asset is priced correctly according to the rate of return and present value conditions
according to the present value condition when would there be opportunities of economic profit?
if the asset price were sometimes greater/ less than the present value of the current and expected future payments
an asset market is efficient if...
it is priced correctly according to economic theory
what does the competition among investors do in the market -what does it do to the asset price
makes the market efficient - makes the asset correctly priced
in an efficient market is there an opportunity for an economic profit?
no
in an efficient market what must the expectations be?
rational
asset market equilibrium is
the rate of return= the present value
according to the rate of return condition when would there be opportunities of economic profit?
when the expected rate of return were above/ below the market interest rate