Capital Markets, Investment and Finance

8035 words 33 pages
Capital Markets, Investment and Finance Assignment 2009/ 2010

“No one can consistently predict either the direction of the stock market or the relative attractiveness of individual stocks and thus no one can consistently obtain better overall returns than the market. And while there are undoubtedly profitable trading opportunities that occasionally appear, these are quickly wiped out once they become known. No one person or institution has yet to produce a long-term, consistent record of finding money-making, risk adjusted individual stock trading opportunities, particularly if they pay taxes and incur transaction costs” (A Random Walk Down Wall Street, p.245, Burton G. Malkiel).

Discuss the above quotation in the light of
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Such event studies which examine the cumulated excess returns around an event have generally concluded that cumulated excess returns before and after an event tend to be zero (Rendleman et al, 1982). Furthermore a famous study (Jensen, 1969) examined 115 US funds between 1955 -1964 and found that returns were less than expected returns, given the level of risk. Furthermore he established that returns before accounting for expenses such as transaction costs and management fees lied around the Securities Market Line. On the other hand the success of Warren Buffet can be seen as proof that one can beat the market and achieve systematic abnormal returns.

Lakonishok and Smidt (1988) and Coutts and Sheikh (2002) questioned the notion of efficient markets as evidence internationally has suggested that seasonality’s occur in both developed and emerging stock markets. Linn and Lockwood (1988) demonstrate evidence of the support of the statement by stressing that most financial economists accept the weekend effect as a ‘stylized fact’ of stock market indices. Therefore, suggesting that EMH cannot hold.

It was recommended by Keane that for an inefficiency to be fully exploited it should be: • Authentic • Identifiable • Persistence • Material

Materiality is the key as it is the measure that states these inefficiencies need to compensate for the costs and risks so


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