Lecture 6: Efficient Markets and Excess Volatility. The Efficient Markets Hypothesis. History of the Hypothesis Reasons to think markets are efficient Reasons to doubt markets are efficient Technical analysis Empirical evidence in literature Homework assignment and regressions.
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“When shares become publicly known in an open market, the value which they acquire there may be regarded as the judgement of the best intelligence concerning them.”
- George Gibson, The Stock Exchanges of London Paris and New York, G. P. Putnman & Sons, New York, 1889
As one of the six most important ideas in finance:
“Security prices accurately reflect available information, and respond rapidly to new information as soon as it becomes available” Richard Brealey & Stewart Myers, Principles of Corporate Finance, 1996
“Suppose a man marries at the age of twenty-three and begins a regular saving of fifteen dollars a month – almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends to accumulate, he will have at the end of twenty years at least eighty thousand dollars. . .I am firm in my belief that anyone not only can be rich but ought to be rich.” John J. Raskob, Ladies Home Journal, 1929
Annuity formula (converted to terminal value) shows that Raskob assumed 26% per year returns: