Discussions
Please respond to this discussion and responses this a 4 part task. Also please keep all parts SEPERATE.
Part 1
Discussion 1: "Efficient Market Hypothesis (EMH)"
Please respond to the following:
• The book discusses the Efficient Market Hypothesis (EMH) and its three forms. The EMH has a lot to do with information and stock prices. How does information get into prices? How do we know if prices reflect all available information? What are abnormal returns? What does the EMH have to say about abnormal returns?
• Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.
Part 2
• The book discusses the Efficient Market Hypothesis (EMH) and its three forms. The EMH has a lot to do with information and stock prices.
How does information get into prices? Information gets into prices through the weak version of EMH based on previous price information. However, this is least significant, because there is public access to a variety of trading data information. Another way information gets into the price is through the semi-strong of EMH; this is most interesting because information in question is usually publicly available; finally, there's the and the strong of EMH, which is based on the public and private information. However, there is a contradiction to this hypothesis, as it is illegal to use insider trading information.
All-in-all the main point is that EMH proposes that profiting from predicted price activities would be very problematic, if not unlikely.
Reference: The Efficient market hypothesis (EMH): Definition and practical implications, (n.d.).
How do we know if prices reflect all available information? Based on EMH, no investor can predict a return on a stock price because everyone has access to information that is already available to everyone else. Therefore, EMH expressed by Eugene Fama in 1970 (Fama, Shiller, and Hansen awarded the Nobel Memorial Prize in Economics in 2013), proposes that at any given time, prices fully reflect all available information.
Reference: Heakel, R., (n.d.), Forbes (opinions expressed by Forbes Contributors are their own), What Is Market Efficiency?
What are abnormal returns? Abnormal returns are the element of return that is not based on market-wide influences; meaning, the abnormal returns are the difference between the actual return and expected to be a result from movements in the market.
Reference: Nasdag, (n.d.), Abnormal returns.
What does the EMH have to say about abnormal returns? EMH declares it is impossible to beat the market. EMH believes a higher rate of return is due to luck rather than skill. EMH supports their beliefs on the fact that many active portfolio managers are not more profitable for their clients than managers who depend on more passive, indexing strategies. Therefore, investors who believe managers add value accordingly expect an abnormal rate of return.
Reference: InvestingAnswers, (n.d.), Abnormal Rate of Return.
Part 3
Discussion
Please respond to the following:
• Go to the New York Stock Exchange website and review the markets covered in Chapter 1. Next, review the short video from the CME group regarding forecasted interest rate increases in 2017. Which markets do you think will be affected by the interest rate forecasts for 2017? How does the U. S. federal government's total debt and current deficit influence the interest rate forecasts?
Part 4
Please respond to this response
Which markets do you think will be affected by the interest rate forecasts for 2017? Foreign Trade, ObamaCare, Hospitals, agriculture and construction will be affected. Policy toward foreign trade is uncertain at this time, impacting companies that export as well as those that import goods for resale, those that import components for manufacturing, as well as businesses involved in transportation and warehousing. All of these sectors account for 33.6 percent of GDP, according to the federal statistics. Businesses most at risk are in agriculture, construction, restaurants/hotels, business and other services, and manufacturing. These industries account for 27.2 percent of GDP. What about ObamaCare? Physician practices and hospitals are all nervous about the future of health care spending, and they constitute 6.5 percent of GDP. How does the U. S. federal government's total debt and current deficit influence the interest rate forecasts? According to CBO's current baseline projections, continued economic expansion over the next two years will virtually eliminate slack in the economy, thus putting upward pressure on inflation and interest rates. After that, the economy is expected to grow a bit more slowly. The projections for later years do not reflect predictions about business-cycle fluctuations or possible changes in fiscal policy; rather, they are based primarily on projected trends of underlying factors, such as productivity, growth in the labor force and in the number of hours worked, inflation, and interest rates. CBO estimates that, in real terms, GDP will expand at an average annual pace of 2.1 percent from the fourth quarter of 2016 to the fourth quarter of 2018, after having risen at an annual rate of 1.8 percent last year (see figure below). Most of the growth in output during the coming years will be driven by consumer spending, business investment, and residential construction, CBO anticipates.