An Efficient Markets Hypothesis is an investment theory saying that all relevant information is always reflected in a security's market place by the security price and its trends. In other world, it states that it is impossible to beat the market because stock market efficiency causes stock prices to reflect all relevant information in all cases. Attempts to outperform the market are therefore more based on chance than on analytical skills.
The Efficient Market Hypothesis theory exists in three various degrees:
- Weak form: current stock prices reflect all past available security market information. Past prices and volume data have therefore no relationship with the future trends of security prices. It is impossible to achieve excess returns by using technical analysis.
- Semi-strong form: stock prices reflect all past and current information available to the public. They adjust rapidly to the release of all new public information.
- Strong form: stock prices reflect all relevant information, including information not yet publicly disclosed.
[...] A broker might also force an investor to close the deal before the stocks prices have decreased. Short sales could be very risky, as you don't own what you are selling. It is very important to know the risks before doing it and have enough money in case there is a loss. Most investors find short selling stocks, too risky and prefer focusing on put options. Governments often restrict the use of short selling because it can produce a downward pressure on the underlying stock and drive down the price of shares of the security. [...]
[...] You purchased 100 shares. The maintenance margin requirement is in the attached list. If the price of the stock falls to $22/share, will you receive a margin call – i.e. will you have to add more money to your account? Explain your calculation. T0 $3500 $1400 loan + $2100 equity Equity % = Euity/Stock value = $2100/$3500 = 0,6 = 60% T1 $2200 $1400 loan + $800 equity Equity % = $800/$2200 = 0,3636 = 36,36% We will not receive a margin call because our equity percentage is higher than the maintenance margin requirement that has been fixed. [...]
[...] Call Option: $53 - $47 = (gross profit) - = (net profit) Put Option: $102 - $97 = (gross profit) - = (net profit) Total Net Profit = + = The combined total net profit I have earned by buying the two options is per share. Explain the five factors discussed in class that affect the premiums of put and call options. (e.g. time to maturity). We have seen five factors that can affect the premiums of put and call options: - The stock price: When stock prices rises, sales of options usually increase. The option price will also increase if the price of the stock rises. This is because the option has value in addition to the time lock of every option. [...]
[...] The next day you added another €3000 to the portfolio. June 30 portfolio value=€19,000; Inflation=6%; CAC40 December 31 value=2300 Calculate your annual return on the portfolio, if no other money was added or removed, and the value on December 31 was €18,360. R1 = (19,000 – 15,000)/ 15,000 = 26,7% R2 = (18,360 – 22,000)/ 22,000 = - 16,54% We now calculate the annual return: Rannée = – 1 Rannée = (1+0,267) – 0,1654) – 1 Rannée = (1,267*0,8346) – 1 Rannée = 1,057 – 1 = 0,057 The annual return on the portfolio is therefore Inflation was the amount in the attached list. [...]
[...] You have decided to buy stock options. You have purchased a call option on Stock A with the exercise price and premium per share in the attached list. You have also purchased a put option on Stock B with the exercise price and premium in the attached list. Call Stk A (Exercise Price=$47, Premium=$6; Put Stk B (Exercise Price=$102/, Premium=$3); Stock A Price Stk B Price Calculate the breakeven price of each of the options, i.e. at what price would the stock have to be so that you have not gained or lost any money by buying each option. [...]
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