FIN/571

  PLEASE RESPOND TO THE FOLLOWING DUE 3/6/2017 WITH 150 WD COUNT PLEASE

BEHAVIORAL CHALLENGES

There are 5 types of behavioral challenges that can effect reaching market efficiency. Market Efficiency is important to provide transparency of the market for investors to receive equal opportunity when choosing stock. The 5 types of behavioral challenges are:

Over confidence- the investor overestimates him ability to choose the best stock. When it doesn't turn out to be the best, the investor will trade it.

Regret- holding onto stock that is not investing to see if it will, then sell it can cause regret for the investor.

Familiarity- only purchasing stock in the familiar territory of the investor. No international purchases or diversity in stocks.

Overreaction- using past experiences to make decisions.

Under-reaction- not accepting new information to assist with decision making.

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill.

MARKET EFFCIENCIES

I found it interesting that stock prices can be affected by company public announcements immediately. Apparently, this does not always happen, but in an efficient market the stock price will adjust per the news announced by the company, say an acquisition or repurchase of stocks, new technology launch, etc. When the stock prices change initially at the time of announcement the stock price will remain constant with no further price changes. However, there are also two other routes that the stock price can take. There could be a slow movement of stock price increase possibly if investors are taking time to absorb the information and identify how the change will affect the company's profitability. This would be a slow climb (like a slow boat to China) up to the appropriate price point, and once that occurs it will remain constant. Another alternative is that there will be an overreaction to the announcement and the stock price will rise sharply after the announcement. This occurs in an inefficient market, but like the forces of nature, will fall back down to the appropriate price point (Ross, Westerfield, Jaffe, & Jordan, 2016).  

Reference

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill.

Market Efficiency

The stock market does not necessarily respond immediately to all available information.  In order to adjust to the various response rates, it is necessary to separate information into different types.  Market efficiency is most commonly categorized into three forms; weak form, semi-strong form and strong form.  Weak form efficiency incorporates only information from the past into stock prices.  This form recommends stock purchase or sale based upon stock prices decreasing or increasing over a span of a few days.  Semi-strong form efficiency incorporates all information that is available to the public including published accounting statements and past price information.  Strong form efficiency incorporates all information, public and private into stock prices. 

Reference

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill.