Senin, 08 April 2013

STOCK MARKET EQUILIBRIUM


Equilibrium
 To summarize, in equilibrium  two related  conditions  must hold:
1.  A stock’s  expected rate  of return  as seen by the  marginal  investor  must equal its required  rate of return:  I   =  kI .
2.  The  actual market price of the stock must equal its intrinsic value as esti- mated by the marginal investor: P0 =  0.
Marginal Investor
A representative investor whose actions reflect the beliefs of those people who are currently trading a stock. It is the marginal investor who determines a stock’s price.
CHANGES   IN   EQUILIBRIUM   STOCK   PRICES
Stock prices are not constant — they undergo  violent changes at times. Stock prices certainly change, sometimes  violently and rapidly, but this simply reflects changing conditions  and expectations.
THE   EFFICIENT   MARKETS   HYPOTHESIS
Efficient Markets Hypothesis(EMH)
The hypothesis that securities are typically in equilibrium  — that they are fairly priced in the sense that the price reflects all publicly available information on each security.
The  Efficient  Markets Hypothesis (EMH)  holds (1) that stocks are al- ways in equilibrium  and (2) that it is impossible for an investor who does not have inside information to consistently  “beat the market.” Therefore,according  to the EMH,  stocks are always fairly valued (Pˆ 0 = P0), the re- quired  return  on a stock is equal to its expected return  (k = kˆ ), and all stocks’ expected returns  plot on the SML.
LEVELS   OF   MARKET   EFFICIENCY
Weak-Form  Efficiency
weak- form efficiency implies that any information that comes from past stock prices is rapidly incorporated into the current  stock price.

Semistrong-Form  Efficiency
states that  current  market  prices  reflect  all publicly available information.
Strong-Form  Efficiency
The  strong form of the EMH  states that current  market prices reflect all perti- nent  information, whether  publicly  available or  privately  held.
IMPLICATIONS   OF   MARKET   EFFICIENCY
Market  efficiency also has important implications  for managerial decisions, especially those per- taining to common stock issues, stock repurchases,  and tender offers. Stocks appear to be fairly val- ued,  so decisions  based  on  the  premise  that  a stock  is undervalued  or  overvalued  must  be  ap- proached  with caution.
ACTUAL  STOCK  PRICES  AND  RETURNS
PREFERRED  STOCK
Preferred   stock  is a hybrid — it  is similar  to  bonds  in  some  respects  and  to common  stock in others.  The  hybrid  nature  of preferred  stock becomes  ap- parent  when we try to classify it in relation  to bonds and common  stock.
a preferred  stock entitles  its owners to regular,  fixed divi- dend  payments.  If the  payments  last forever,  the  issue is a perpetuity  whose value, Vp, is found as follows:
                                                                                Vp =                                        
Allied Food  Products  has preferred  stock outstanding that pays a dividend of $10 per year. If the required  rate of return  on this pre- ferred stock is 10 percent, then its value is $100, found by solving Equation  9-8 as follows:
Vp =   
In equilibrium  the expected return,  ˆkp, is equal to the required  return,  kp. Thus, if we know the current  price of a preferred  stock and its dividend, we can solve for the expected rate of return  as follows:
kˆ p =   .                                                      
                                    




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