FIN 300 Lecture Notes - Lecture 10: Efficient-Market Hypothesis, Dow Jones Industrial Average, Technical Analysis
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Security prices change without predictable trends or patterns. Stock prices seem to go up or down on any particular day, regardless of what has occurred on previous days. The(cid:396)efo(cid:396)e, o(cid:374)e (cid:272)a(cid:374)"t use past patterns to predict future price changes. Random walk is a proof of market efficiency: efficient market hypothesis (emh) Since all information is rapidly incorporated into the price of the stock, all stocks are correctly priced and no investor or issue(cid:396) (cid:272)a(cid:374) ea(cid:396)(cid:374) (cid:862)e(cid:454)(cid:272)ess(cid:863) (cid:396)etu(cid:396)(cid:374)s: three forms of emh. Weak form: market prices reflect all information contained in past market prices. Semi-strong form: market prices reflect all publicly available information. Strong form: market prices reflect all known information. Bay street and wall street often do not agree with the emh. Technical analysts search for patterns in past prices attempt to predict future stock prices. Emh says trading rules should not work. Technical analysis may not work, but technical analysts can help keep the markets efficient.