A number of additional anomalies has been documented in the financial markets, including the existence of Closed-End Investment Fund Discounts A closed-end investment fund issues a fixed number of shares at inception and does not sell any additional shares after the initial offering. Therefore, the fund capitalisation is fixed unless a secondary public offering is…
Researchers conclude that a market anomaly may be present if a change in the price of an asset or security cannot directly be linked to current relevant information known in the market or to the release of new information into the market. In the widespread search for discovering profitable anomalies, many findings could simply be the…
The implications of efficient markets to investment managers and analysts are important because they affect the value of securities and how these securities are managed. Several implications can be drawn from the evidence on efficient markets for developed markets: Fundamental Analysis Fundamental analysis is the examiniation of publicly available information and the formulaiton of forecasts…
For markets to be efficient, prices should adjust quickly and rationally to the release of new information. In other words, prices of assets in an efficient market should “fully reflect” all information. Market Participants One of the most critical factors contributing to the degree of efficiency in a market is the number of market participants. …
An informationally efficient market (an efficient market) is a market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information. Investment managers and analysts, as noted, are interested in market efficiency because the extent to which a market…
Three of the most widely followed alternative investment classes are commodities, real estate, and hedge funds. Commodity Indexes Commodity indexes consist of futures contracts on one or more commodities, such as agricultural products (rice, wheat, sugar), livestock (cattle, hogs), precious and common metals (gold, silver, copper), and energy commodities (crude oil, natural gas). Real Estate…
Construction The fixed-income universe includes securities issued by governments, government agencies, and corporations. Each of these entities may issue a variety of fixed-income securities with different characteristics. As a result, the number of fixed-income securities is many times larger than the number of equity securities. To represent a specific fixed-income market or segment, indexes may…
Some of the major uses of indexes include: Gauges of Market Sentiment The original purpose of stock market indexes was to provide a gauge of investor confidence or market sentiment. As indicators of the collective opinion of market participants, indexes reflect investor attitudes and behaviour. Proxies for Measuring and Modelling Returns, Systematic Risk, and Risk-Adjusted…
Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index. To maintain the weight of each security consistent with the index’s weighting method, the index provider rebalances the index by adjusting the weights of the constituent securities on a regularly scheduled basis (rebalancing dates)—usually quarterly. Rebalancing is necessary because the weights…
Constructing and managing a security market index is similar to constructing and managing a portfolio of securities. Index providers must decide the following: Target Market and Security Selection The first decision in index construction is identifying the target market, market segment, or asset class that the index is intended to represent. The target market may…