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Capm and Market Efficiency: Limitations and Degrees, Slides of Fundamentals of E-Commerce

Biju Patnaik University of Technology Fundamentals of E-Commerce

The limitations of the capital asset pricing model (capm) and the concept of market efficiency. Issues with estimating future market returns, determining the risk-free rate, and calculating beta. Additionally, it explains the three degrees of market efficiency: weak, semi-strong, and strong form.

Typology: Slides

2012/2013

Uploaded on 07/30/2013

ekyan 🇮🇳

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CAPM Drawbacks

•Estimating expected future market returns on

historic returns.

•Determining an appropriate rf

•Determining the best estimate of β

•Investors don’t totally ignore unsystematic risk

•Betas are frequently unstable over time

•Required returns are determined by

macroeconomic factors

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CAPM Drawbacks^ •^ Estimating expected future market returns onhistoric returns.^ •^ Determining an appropriate

•^ Determining the best estimate of

•^ Investors don’t totally ignore unsystematic risk •^ Betas are frequently unstable over time •^ Required returns are determined bymacroeconomic factors

Market Efficiency •^ Capital markets are efficient if prices adjust fullyand instantaneously to new information affectinga security’s prospective return.

Weak Form Market Efficiency •^ Security prices capture all of the informationcontained in the record of past prices andvolumes •^ Implication:

No investor can earn excess returns using historical price or volumeinformation.

Technical analysis should have no marginal value.

Semi-Strong Form Market Efficiency •^ Security prices capture all of the informationcontained in the public domain. •^ Implication:

No investor can earn excess returns using publicly available information.Fundamental analysis should have no marginalvalue.