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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level, 2005,Pearson Education Canada Inc.,7-,*,Chapter 7,The Stock Market, The Theory of Rational Expectations, and the Efficient Markets Hypothesis, 2005 Pearson Education Canada Inc.,(1),Computing the Price of Common Stock,Basic Principle of Finance,Value of Investment = Present Value of Future Cash Flows,One-Period Valuation Model,2, 2005,Pearson Education Canada Inc.,Generalized Dividend Valuation Model,Since last term of the equation is small, Equation 2 can be written as,(3),(2),3, 2005,Pearson Education Canada Inc.,Gordon Growth Model,Assuming dividend growth is constant, Equation 3 can be written as,Assuming the growth rate is less than the required return on equity, Equation 4 can be written as,(5),(4),4, 2005,Pearson Education Canada Inc.,Theory of Rational Expectations,Rational expectation (RE) = expectation that is optimal forecast (best prediction of future) using all available information: i.e., RE,X,e,=,X,of,2 reasons expectation may not be rational,1. Not best prediction,2. Not using available information,Rational expectation, although optimal prediction, may not be accurate,Rational expectations makes sense because is costly not to have optimal forecast,Implications:,1.Change in way variable moves, way expectations are formed changes,2.Forecast errors on average = 0 and are not predictable,5, 2005,Pearson Education Canada Inc.,Efficient Markets Hypothesis,P,t+1, P,t,+ C,RET,=,P,t,P,e,t+1, P,t,+ C,RET,e,=,P,t,Rational Expectations implies:,P,e,t+1,=,P,of,t+1,RET,e,=,RET,of,(1),Market equilibrium,RET,e,=,RET,*(2),Put (1) and (2) together: Efficient Markets Hypothesis,RET,of,=,RET,*,Why the Efficient Markets Hypothesis makes sense,If,RET,of,RET,*,P,t,RET,of,If,RET,of,R*,predictions of,P,small,4.Technical analysis does not outperform market,Unfavorable Evidence,1.Small-firm effect: small firms have abnormally high returns,2.January effect: high returns in January,3.Market overreaction,4.Excessive volatility,5.Mean reversion,6.New information is not always immediately incorporated into stock prices,Overview,Reasonable starting point but not whole story,7, 2005,Pearson Education Canada Inc.,Implications for Investing,1.,Published reports of financial analysts not very valuable,2.Should be skeptical of hot tips,3.Stock prices may fall on good news,4.Prescription for investor,1.Shouldnt try to outguess market,2.Therefore, buy and hold,3.Diversify with no-load mutual fund,Evidence on Rational Expectations in Other Markets,1.Bond markets appear efficient,2.Evidence with survey data is mixed,Skepticism about quality of data,3.Following implication is supported: change in way variable moves, way expectations are formed changes,8, 2005,Pearson Education Canada Inc.,谢谢观看,/,欢迎下载,BY FAITH I MEAN A VISION OF GOOD ONE CHERISHES AND THE ENTHUSIASM THAT PUSHES ONE TO SEEK ITS FULFILLMENT REGARDLESS OF OBSTACLES. BY FAITH I BY FAITH,内容总结,Chapter 7。One-Period Valuation Model。Xe = Xof。Rational Expectations implies:。RETe = RET*(2)。RETof = RET*。Implications for Investing。4.Prescription for investor。2.Therefore, buy and hold。1.Bond markets appear efficient。谢谢观看/欢迎下载,
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