Answered: You believe you have found a trading…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 6MC

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You believe you have found a trading strategy that could make significant profits. It requires looking at analyst forecasts and purchasing stock where there
has been an upgrade in the recommendation and selling shares where there has been a downgrade in the recommendation.
a. Describe which form the Efficient Market Hypothesis will be viola ed if you are able to make significant profits from your trading strategy in the future.
b. List three factors that you may be overlooking in assessing the profitability of your trading strategy.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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