The paper "Why the Capital Markets Are Expected to Be Efficient" is a great example of an assignment on business. The purpose of writing the paper is to provide an overview of the work which has been done in a very important area for doing the research on the financial papers to give detailed results of the common stock returns. It has been done not to be getting down in any way of technical details. The paper has got a lot of important research in the discussion above. Throughout this discussion, the empirical result is to maintain the financial theory of this research paper.
Is it possible for investors to find trends in the past stock prices and beat the market? Explain the tests which are used to analyze the relation between past performance and stock returns. The test which they have used for the relation between the past performance and stock returns are as follows: Markowitz Portfolio selection: This model is the single-period model, where an investor can form a portfolio at the beginning of this selection process.
The objective of this model is to maximize the expected return of the portfolio and to increase the level of risk. The expected return and the standard deviation are changing in a specific way. The ways in which they are being added do vary from other portfolio securities. This model is specified for those investors who are very desperate to take the risk regarding the business choose portfolio A, whereas the investors who are risk-averse choose portfolio B. Capital Asset Pricing Model (CAPM): In this model, it has assumed that investors used Markowitz in getting a portfolio, this model further assumes that there is a risk-free asset that gives a certain return to the investors.
Having a risk-free asset the investors do not have any efficient frontier that they can perform to do. In order to keep the market equilibrium, it has stated that the quantity supplied is equal to the quantity demanded. So the investors can make a combination for the market portfolio and as well as for the risk-free asset. If the CAPM has an accurate description then there is a positive relationship that can be observed by the investors which compensates for the bearing of the asset.
The CAPM varies from the market portfolio that is being got from different market places.
ReferencesSatchell, Stephen. Forecasting Expected Returns in the Financial Markets. 2011. Web. 23rd April, 2014. London: Academic Press. Print.