MGMP 543, FINANCE
Topic 13 – Efficient Market Hypothesis
Professor Kunal Sachdeva
1
,Objectives
• Motivation: what is market efficiency? Why do we care?
• Let’s test the “Wisdom of Crowds!”
• Efficient Market Hypothesis
• Distinguish versions of market efficiency
• Weak Form
• Semi-Strong Form
• Strong Form
• Implication for Investing
• Alternatives to the CAPM
• APT
• Fama-French 3 Factor Model
2
,3
, Investment vs Financing
We’ve Only Considered Investment Opportunities
• Up to this point, we have only considered investment opportunities
• Questions such as “given the cashflows, should we invest?”
• When investing in a project, a company is highly specialized in this area
• Likely to have advantages, and may have positive NPV opportunities
Let’s Now Consider Financing Opportunities
• Another side is how to we get financing to pay for such investments
• When competing for dollars to invest in a company, it is a highly competitive market that is
looking ‘profitable’ opportunities.
4
Topic 13 – Efficient Market Hypothesis
Professor Kunal Sachdeva
1
,Objectives
• Motivation: what is market efficiency? Why do we care?
• Let’s test the “Wisdom of Crowds!”
• Efficient Market Hypothesis
• Distinguish versions of market efficiency
• Weak Form
• Semi-Strong Form
• Strong Form
• Implication for Investing
• Alternatives to the CAPM
• APT
• Fama-French 3 Factor Model
2
,3
, Investment vs Financing
We’ve Only Considered Investment Opportunities
• Up to this point, we have only considered investment opportunities
• Questions such as “given the cashflows, should we invest?”
• When investing in a project, a company is highly specialized in this area
• Likely to have advantages, and may have positive NPV opportunities
Let’s Now Consider Financing Opportunities
• Another side is how to we get financing to pay for such investments
• When competing for dollars to invest in a company, it is a highly competitive market that is
looking ‘profitable’ opportunities.
4
