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Applied Investment - Financial and Economic Context

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Daniel V.
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  1. Introduction
  2. Efficient Market Hypothesis
  3. Application of EMH Theory in Real Financial Markets
  4. Economic Factors Affecting the Efficiency of Markets
  5. Government Interventions to Influence Investment Portfolio Performance
  6. Conclusion

Every single investor is interested in maximizing investment returns while simultaneously minimizing risk subjected to the investment. Consequently, investors prefer committing their resources in receptive economic systems free from uncertainties that may hamper their anticipated returns. In practice, the investors find their desire hard to accomplish given that they are frequently required to deal with emerging constraints arising in the economic and financial sectors. Of great concern here is the price which investors pay in form of hurdles emerging from the economic vicious circle comprising deepened sovereign-debt crisis, slowing economy and fragility in financial institutions. The contemporary business enterprises operate in a complex economic system where multiplicative factors exist in forms of weak public debt sustainability, global pressure in the sovereign debt markets, and the vulnerability of banking sector through sovereign exposures alongside the global recession (Bekx, 2012, p. 4). It is for the above mentioned factors that countries in the Euro area have devised new measures to respond to the five-year financial crisis. In reality these measures are directed to address the removal of market uncertainties relating to member states, conducting budgetary consolidation and growth in vulnerable member economies, establishing economic firewalls against contagion in the sovereign debt markets, reinforcing the EU banking sector, and strengthening of the euro-area governance framework (Bekx, 2012, p. 11).

[...] R. (2007). Portfolio Management (including Security Analysis). New Delhi: Concept Publishing Company. Bekx, P. (2012). The European Sovereign Debt Crisis and the Future of the Euro. European Commission, Economic and Fianancial Affairs. Clarke, J., Jandik, T., & Mandelker, G. (n.d.). The Efficient Markets Hypothesis. [...]


[...] The government will then privatize the institutions again to enhance liberalization of the economy, and level the playing ground. This restores the investors' confidence when the government conducts regular oversight and enforce quick response to avert systemic crisis witnessed in Spain. Lastly, the government may set up capital injections and guarantee schemes to cover liabilities of financial and investment institutions (OECD p. 9). Bibliography Alajbeg, D., Babies, Z., & Sonje, V. (2012). The efficient market Hypothesis. Financial Theory and Practice, 53-72. Babu, G. [...]


[...] Within those levels, investors will not expect abnormal returns in such stocks. Secondly, the semi - strong form of efficient market theory perceives that undertaking fundamental analysis to provide insight to future performances will definitely fail. There exist a considerable number of well-informed and financed firms conducting similar market analysis, and in such level of competition it is difficult to uncover more accurate information than other rival analysts (Vialar p. 234). This implies that using a similar source of information, discovery of good stocks is no good for the investor as others too will have known such good firms as well. [...]


[...] For instance, one will need the services of professional analysts to gather relevant interpretation in the vast information including industry reports, financial research and management journals, annual company publications and databases, to effectively track the price movements. Consequently, no publicly available information can be profitably exploited for profit; dispelling importance of conducting fundamental analysis as such cannot be used profitably for active investment management (Xie p. 208). Lastly, the strong form suggests that current prices of securities fully incorporate all information existing in both public and insider forms. [...]


[...] Consequently, payoffs from the information that investors may obtain will never outweigh the cash outflow incurred in the form of research and transaction costs. Under Fama's interpretation of the EMH, the impact of sophisticated investors is so strong in the market, that they reduce the dispersion of an actual price distribution close to their expected value (Alajbeg, Babies, & Sonje p. 56). Fama and Samuelson, like many other scholars in applied investment gave their interpretation of the EMH stance on how market efficiency is attained. [...]

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