Page 220 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 7: Efficient Market Theory

7.10 Keywords Notes

Efficient Capital Market: An efficient capital market is one in which security prices adjust
rapidly to the arrival of new information and, therefore, the current prices of securities reflect
all information about the security.
Market Portfolio: Market portfolio is a theoretical portfolio in which every available type of
asset is included at a level proportional to its market value.
Market Value of an Investment: The market value of an investment is described as its current
price on the market.
7.11 Self Assessment

Fill in the blanks:
1. Modern portfolio theory uses the ................, to select investments for a portfolio.
2. ................ is a measure of how much a financial instrument, changes in price relative to its
market.
3. Virtually every major portfolio manager today consults an ................ programme.
4. Market ................ has implications for corporate managers as well as for investors.
5. ................ provide liquidity to investors who need to sell or buy securities for purposes
other than "betting" on changes in expected returns.
6. The most obvious indication that the market is not always and everywhere ................ form
efficient is that money managers frequently use public information to take positions in
stocks.

7. The efficient market theory is a good first approximation for characterizing how prices in
a liquid and free market react to the disclosure of ................
8. The efficient frontier has a ................ shape.

9. Modern portfolio theory constructs portfolios by mixing stocks with different ................
and ................
10. The ................ form implies that the knowledge of the past patterns of stock prices does not
aid investors to attain improved performance.
11. An investor can add ................ to the portfolio by borrowing the risk-free asset.
12. A ................ is a portfolio consisting of a weighted sum of every asset in the market, with
weights in the proportions that they exist in the market.
13. Fama divided the overall efficient market hypothesis (EMH) and the empirical tests of the
hypothesis into ................................... sub-hypotheses.

14. One would always want a portfolio that lies ................ along the efficient frontier, rather
than ................
15. Acts of nature may move prices, but if private information release does not, then we know
that the information is already in the ................

LOVELY PROFESSIONAL UNIVERSITY 215