FNCE 239 Chapter Notes - Chapter 2: Efficient-Market Hypothesis, United States Treasury Security, Capital Asset Pricing Model

• School: UPenn
• Department: Finance
• Course: FNCE 239
• Professor: N I K O L A I R O U S S A N O V

Document Summary

It is somewhat possible to predict longer-term stock prices using the fama-french three-factor model instead of the capm model. Fama believes there is aa rational basis for all stock behavior. Spread of the market return over the treasury bill rate. Small-stock factor- the difference in the returns of small and big stocks o o: value-growth factor- the difference between a diversified portfolio of value stocks v. growth stocks. Believes that government should stay out of businesses. Fama prize lecture notes: two pillars of asset pricing. 2 pillars: efficient capital markets, asset pricing model- specifies asset returns in market equilibrium. Joint hypothesis problem- if the asset pricing model fails, we don"t know if it"s because the market is inefficient or if the model is incorrect. There is no autocorrelation (past and future stock returns are not related) Capm tests market efficiency by assuming all info is available to everyone. The predictability of stock and bond returns is rational.