Lecture - 6 Market efficiency and security pricing
Sunday, November 29, 2020
12:52 PM
Lecture 2 = historical analysis = past =we use this information to estimate /forecast 
Information for past  (weak) 
                             present  (semi strong)
                             future (present & future ) strong 
NPV = Net present Value = is one of the standard acceptance rule /method 
Information will come randomly
Information always fluctuates
Stock prices always changes/fluctuates
If it is positive information - I will buy the shares
If it is negative information - I will sell the shares
Efficient Market Theory (EMH) h = hypothesis
Information for past  (weak) 
                             present  (semi strong)
       future (present & future ) strong - insider information 
1st December, 2020
Stock markets will perform (see the website )
Project appriasal = NPV (net present value - time value of money) 
 r = risk = returns = discount rate 
  risk will change from business to business, stock to stock,  day to day, time to time
How market perform , risk also changes , if markets are performing positively risk will be less, if markets are performing bad , risk will be high 
If r value increases PV decreases
If r value decrease PV increases
Everyone of investors will wish to minimize the risk factor 
Stock prices changes based on the information they receive
Information is based on profits, markets, regulations, appointment of directors, contracts , internal management, performance (income statement)
Information will come randomly (unexpectedly) 
Information will have influence on stock prices, positively or negatively 
Every individual (investor) have their own choice, every investor wish to avoid (minimize) risk 
MSM = financial , industry, services, shariah
Do not put all the eggs in one basket
The purpose of creating a portfolio is to diversify the investments in order to minimize the risk
Correlation = relationship between two or more than two stocks
Range of correlation 
+1.0 we are investing in only one type of stocks
-1.0 it means investor is diversifying (negative relationship - diversification - risk will less) 
If more negative (-.08) the portfolio is more diversified and less risk
Fundamental analysis = calculation of NPV, IRR ….(project appraisal methods) 
Before any decision of investment is taken it is called as fundamental analysis
After decision of investment is taken the evaluation of performance is known as Technical analysis
Technical analysis = graphs, tables, past prices (what is reflected in MSM website is a technical analysis) - Historical analysis - Lecture 2 
Examples - mean, standard deviation, sensitivity analysis
MSM - announcement 
Information = + / - 
The information should be available to all stakeholders equally (small investor or a big investor) - information is given online and real time basis
Based on information, investor will buy or sell the equity shares
Amerat / Mabela 
20 years back , purhased land 
Once the information is released the value of information is zero
Past information = weak (already everyone knows) - it helps to make an estimate / forecast to know the trend - Technical analysis - WEAK FORM
Information available on websites - online and real time information - home page of MSM - announcements - SEMI STRONG
Private information - information known to people who are insiders (working within the firm/ associating with the firm) positive and negative  information STRONG FORM
Because of this the share prices on stock market will have impact 
Pt = p t-1  = historical information
Mean, standard deviation = estimates / forecast 
                                    error element ( variance )
Oil prices = every day every moment the oil prices will change  
Random error = new information comes the prices of stocks will vary based on its positive or negative 
Stock prices will move both ways up and down
Technical analysis - past information 
Market efficiency = new information is significantly important  .   
Upward movement as well as downward movement will also be there 
When an investor will lose the value of the wealth , investor will gain experience, next time he will be more mature in terms of investment decisions 
Nokia , blackberry 
Kia, Hyundai 
Its all about current available real time information
Semi strong form - online, real time information 
Publishing it on websites , social media (it is available to all stakeholders equally) 
MSM - announcements, home page - website ( best example of semi strong market) 
Top gainers, top losers, volume, turnover 
Last 6 years information is available + current information 
Any information to be released it has to come through regulator (MSM) 
Stock price = 1.200 RO
Good news = go up 1.600 RO
Investors expect it will go beyond 1.600 RO (over reaction ) 
Days before announcement ( information is still private) , once informaton is released , investors will take the advantage 
When profits are announced the share price will go up
When dividends (are expenses to the company) are announced the share price will go down
Bad news will make the value of the share zero, it only reduces the value to some extent then it becomes stable
Bad news is a short term , one time news , again there will a recovery with good news 
2019       - 2020         - 2021 
Give examples of companies in oman 
Compare MSM -30 index and support it with analysis / graphs - give references
1st december, 2020
5th december, 2020 + / - ( people who are working /associated with the firm know it all - assume it’s a positive information - after 5th december, the value of the share will increase
1st december, the person will buy @ 1.210 RO , on 5th december after information is released the value will go up to RO 2.000 (insider trading) 
6 th December, 2020
Information set of past prices = weak form
Information set of publicly available information = semi strong
All (public and private) information relevant to a stock (strong form) 
Empirical evidence 
  Weak form efficiency
  a.  Yes, new information that comes in , it will change the value of the stock in both ways (  + / -)
Semi strong form efficiency 
   yes
Strong form efficiency 
  wealth managers/ investment manager/ specialist 
 yes
If the stock prices goes up, it will climb slowly = over a period of one year / 6 months 
Random information / new information 
Positive information /negative information will be incorporated in the stock 
Regulations / announcement - quantitative - non quantitative 
Impact on the share price 
Announce profits - the value of the share will increase 
Announcement of dividends = the share will decrease 
Mergers = the firm which is acquiring the other firm , share will decrease, whereas the acquired firm value will increase ( mismangement firm is taken over by the efficient ) 
Issue of new shares = the market value of the existing shares will decrease =
Mostly the markets are in the form of SEMI STRONG
From reliable sources not to be named 
Trust market prices = current prices should always be given priority 
Summary:
Importance of Information 
Random walk theory 
Fundemental analysis & technical analysis 
EMH 