Purpose of Assignment
The purpose of this assignment is to allow the student an opportunity to explain what it means to have an efficient capital market. Students will gain an understanding of the different levels of market efficiency and how behavioral finance can inhibit reaching market transparency.
Resources: Microsoft® Word
Explain in 525 words what it means to have efficient capital market, including:
- Describe the behavioral challenges in achieving efficiency.
- Discuss the three forms of market efficiency.
- What are the implications to corporate finance?
- Would you consider the real estate market an efficient capital market? Please explain why or why not.
Explanation & Answer
Capital market efficiency describes the determination of the speed, accuracy, and the scope
within which the available information can be embodied into security prices
Behavioural challenges in achieving efficiency
Suppose that the superior, rational analysis shows that a firm is overvalued, arbitrage would
suggest that the firm should short the shares.
Most times, people are not rational. Many investors do not diversify, some trade too much, and
some try to maximize returns by selling winners too quickly and holding losers for too long
Forms of Market efficiency
The forms of the efficient market include the semi-strong, strong, and the weak type efficient
Corporate Finance Implications
In the event that that markets are entirely efficient, the value of the market firm shows the
expected present value of the firm’s future cash flows.
Is the real estate Market efficient?
An efficient market entails a market when buyers and sellers hold perfect information i.e. the
prices reflects the available information whether public or private. Rreal estate is not an efficient