The paper "Three Forms of Markets Efficiency" is a good example of a marketing assignment. Efficient frontier represents the ideal portfolios that offer the best-expected return for a given risk level. It can also be used to describe the lowest risk for a specified expected return. Consequently, portfolios that fall under the efficient frontier are considered suboptimal since they do not result in enough return for the given risk level. At the same time, those that fall to the right of the efficient frontier are also termed as suboptimal since they translate to a higher risk level for the rate of return under consideration (Boubaker, & Sghaier, 2013).
Below is a representation of the efficient frontier: Fig: Sketch of the efficient frontier Q2: three forms of markets efficiency Weak form The weak form of market efficiency is anchored on the history of price sequence. The weak form theory postulates that stock prices are already a reflection of the entire information that could be extracted through the examination of market trading data like the performance of past prices, the volume of trade, or the short interest. In essence, the theory holds that it is not possible to detect mispriced securities in an effort to conquer the market through past price analysis.
According to the weak form, changes in the price of stock follow a random walk and are impossible to forecast on the basis of available past stock performances. Therefore, one cannot be able to benefit from the use of information that was known to everyone else (Yadirichukwu & Ogochukwu, 2014). Semi-strong form The semi-strong form holds that the prevailing prices fully takes into account all the information available to the public.
In this hypothesis, public information does not only include past prices but also all the information included in a company’ s financial statements, dividend information, declared merger plans, earnings, the performance of other competing businesses etc. The public information is not restricted to financial data. In fact, it could include critical data on the company’ s quality management and patents held (Rizvi et al. , 2014). Strong form The strong form maintains that stock prices actually reflect the totality of information relevant to the company, including information held only by the core players in the operations of the company that have custody of plans and policies.
Beyond the semi-strong form of market efficiency, the strong form maintains that no one should benefit from the use of the company’ s information not available to the public. For instance, the management team should not benefit from inside information by purchasing company shares a few minutes after they resolved to pursue what could be an important acquisition (Rizvi et al. , 2014). Q3: Analysis of beta = 1.3 The single index model is also referred to as the market model.
The model analyses the portfolio risk of a given investment by considering the sensitivity of the security against the adjustments of the portfolio market return. As … states, the beta value is an indication of the response of the market return according to the changes of security return. It represents the sensitivity of the security return with regard to the changes in the overall market returns. That is, it indicates the level of risk of a given security, when the security is held in a sufficiently diversified portfolio (Mandal, 2013).
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Mandal, N. (2013). Sharpe’s single index model and its application to construct optimal portfolio: an empirical study. Great Lakes Herald, 7(1): 1 – 60
Rizvi, S. A. R., Dewandaru, G., Bacha, O. I., & Masih, M. (2014). An analysis of stock market efficiency: Developed vs Islamic stock markets using MF-DFA. Physica A: Statistical Mechanics and its Applications, 407, 86-99.
Yadirichukwu, E. & Ogochukwu, O.J. (2014). Evaluation of the weak form of efficient market hypothesis: Empirical evidence from Nigeria. International Journal of Development and Sustainability, 3(5): 1199 – 1244
Pamane K & Vikpossi E. (2014). An Analysis of the Relationship between Risk and Expected Return in the BRVM Stock Exchange: Test of the CAPM. Research in World Economy. Vol. 5, No. 1, pp:13-28.