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Chapter 9

Security Market Efficiency and Returns

Book Version 3
By Boundless
Boundless Finance
Finance
by Boundless
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Section 1
The Security Markets
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Types of Stock Market Transactions

Types of stock market transactions include IPO, secondary market offerings, secondary markets, private placement, and stock repurchase.

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Types of Market Organizations

There are three main types of market organization that facilitate trading of securities: auction market, brokered market, and dealer market.

Section 2
Understanding Returns
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Reporting

When accounting for capital gains and losses in the securities market, understanding reporting responsibilities and potential reductions is critical.

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Dollar Returns

The dollar return is the difference between the final value and the initial value in nominal terms.

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Percentage Returns

Percentage returns show how much the value of the investment has changed in proportion to the size of the initial investment.

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Historical Returns: Market Variability and Volatility

Markets and securities may follow general trends, but exogenous factors (such as macroeconomic changes) cause variability and volatility.

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Calculating and Understanding Average Returns

Average returns are commonly found using average ROI, CAGR, or IRR.

Section 3
Market Efficiency
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Behavior of an Efficient Market

Efficient-market hypothesis (EMH) asserts that financial markets are informationally efficient and should therefore move unpredictably.

The Efficient Market Hypothesis

The EMH asserts that financial markets are informationally efficient with different implications in weak, semi-strong, and strong form.

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Implications and Limitations of the Efficient Market Hypothesis

The limitations of EMH include overconfidence, overreaction, representative bias, and information bias.

Section 4
Market Regulation
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Securities Act of 1933

The Securities Act of 1933 ensures investors receive complete and accurate information before they invest.

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Securities Exchange Act of 1934

The Securities Exchange Act of 1934 is a law governing the secondary trading of securities, financial markets and their participants.

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Securities Acts Amendments of 1975

The 1975 amendments are to establish a national market system for the nationwide clearance and settlement of securities transactions.

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Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act is to set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.

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Global Research Settlement

The Global Settlement was an enforcement agreement to address issues of conflict of interest within the SEC and other big investment companies.

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Boundless Finance by Boundless
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Chapter 8
Introduction to Risk and Return
  • Understanding Return
  • Portfolio Considerations
  • The Impact of News of Expected Returns
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  • Implications Across Portfolios
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Current Chapter
Chapter 9
Security Market Efficiency and Returns
  • The Security Markets
  • Understanding Returns
  • Market Efficiency
  • Market Regulation
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Chapter 10
Introduction to the Cost of Capital
  • The Basics of the Cost of Capital
  • Valuing Different Costs
  • Approaches to Calculating the Cost of Capital
  • The WACC
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