Lecture $1-$ Efficient Markets

You have a market where upon analyzing daily returns you determine annualized

returns of $7\%$ and a annualized standard deviation of $25\%.$ Over a time period of

$2$ years you find $142$ instances of two subsequent price increases, $106$ instances of

subsequent price drops and $202$ instances of price reversals on following days. Is the

market efficient?

In the same market as above, you find $2-$day returns to have a volatility of $3\mathrm{.}25\%.$

Is the market efficient?

Lecture $2-$ Information contagion

Looking at the prices of a variety of stocks, you make the observation that it is

mainly small and less well known, but liquid, stocks that exhibit prolonged patterns

of increasing and decreasing prices. Other stocks do not show any prolonged periods

of price trends. How can you explain this observation?

You start trading in a market in which you have very limited experience but know

well a number of other traders. In order to learn how this market operates, you

start to copy the behaviour of those traders you know. A friend tells you that you

should not be doing that as it is very irrational and will lead to nothing and just

gives rise to booms and bust in the market. Is your friend right in his assertion?

Lecture $3-$ Stock valuation models

A stock currently pays a dividend of $.$L$\text{'}1$ and is expected to grow at $3\%$ p$.$a$.$ The

risk$-$free rate is $2\%$ p$.$a$.$ and the company has a volatility of $20\%$ p$.$a$.,$ its correlation

with the market index is $0\mathrm{.}7.$ What is the value of this stock?

How would your answer to question $1$ change if the dividends in the coming two

years were $t^{2}2$ and would then fall back to its previous growth path?

$"$If the price of a stock deviates from the fundamental value as determined ex$-$post

through the observation of actual dividends, this is a sign of the market being

inefficient." Is this statement correct?