Through reading the chapter 13 of 'Corporate Financial Management ' written by Arnold.G, i know that market efficiency means that the errors which are made in pricing shares are unbiased and price deviations from true value are random. Owing to its special meaning, if the market has high efficiency, it can bring a large amount of benefits to different groups in the stock market : Firstly, as investors, they will be encouraged to buy the shares because of the high efficiency existing in the market; Secondly, as for companies' managers, they can gain the accuracy information about market, as a result, these important information could play an important role in the analysis of market conditions; Thirdly, the efficiency of market can enhance the allocation of resources available, in order to take advantage of accessible resources. So there are three resultant types of efficiency: operational efficiency, allocational efficiency and pricing efficiency. Meanwhile, in the lectures, tutor also mentioned a very famous concept 'Random Walk', which in my understanding is that as members of stock market, we can not predict one day's share price change by looking at the previous day's price change. The most important is that the rule of security prices responding to news is random. In my opinion, all information can affect the market efficiency and from this, it can also influence the share prices in the market; but the information cannot decide the share prices directly. There is another theory about efficiency of the market, which we can called 'Efficiency Market Hypothesis (EMH)' . The EMH has different implications to two different parties that participate in stock market, respectively are investors and companies. As a individual investor, if we understand these implications, we could avoid some mistakes when we take part in market's investment activities. We need to press for a greater volume of timely information and the public information only can help us learn the basic state about market, it may not make us earn abnormal returns. We can believe that more constraints and deterrents placed on insider dealers could build a fair game market by the actions of governments. After reading about EMH, i also understand the responsibilities as financial managers of companies are to focus on substance, not be aimed at short-term appearance and we need take the signals from price movements more seriously.
By reading further literatures about stock market, i have gotten more knowledge about different types of shares and other relevant concepts, which may be useful when we need to choose the investment target by studying different securities performance in the market. As for equity capital, it is divided into two important areas: ordinary shares and preference shares. I have understand the huge difference between these two shares in the stock market. People who hold ordinary shares have some distinctive rights compared with the holders of preference shares. By means of learning the merits and demerits of these shares, i could know more about the structures of actual stock market in operation, which will be good for me to choose the investment forms in the future career, it could help me make decisions when i meet the same dilemmas. Moreover , Chapter 2 explain the relevant things about issue, which i lacked before. Comprehend the various methods of issuing, i have gained a lot, which could contribute to deciding what unlike ways should companies at different levels take to issue their shares, this is of significance to the companies' developments.
With regard to the learning content of week4, it is mainly concerned about portfolio theory and Capital Asset Pricing Model. According to the lectures and directed reading, i have learnt a lot from the main concepts and gotten my own understanding about these theories and construction of models. During the development of the portfolio theory in recent several years, it has reached a consensus that there are two types of risks existing in the stock market, one is systematic risk and the other is unsystematic risk which could be diversified away by disperse investment( holding enough differentiating investment as many as possible to reduce the risk of concentrated investment). Through analyzing the expected returns and standard deviations of investments in a portfolio, we could calculate the expected risk-returns of chosen portfolios. Thus, we will compare the risk-returns of different portfolio we could choose and in view of the realistic management status. In the CAPM, the figure of Beta represents the systematic risk and it indicates the sensitivity of particular share to general market movements. Meanwhile, i know that the greater the variety of shares in a portfolio, the more unsystematic risk will be eradicated. Taking the role of investors, we can combine the most efficient portfolio of risky assets with the risk-free asset in order to construct a portfolio which satisfies our risk and return requirements and hence maximizes utility. In my opinion, the CAPM is just a model which builds on portfolio theory, describes a linear relationship between the systematic risk of a security and its required rate of return, which is called' security market line(SML)'. When we choosing the invested portfolios, we could compare those shares by SML and get the best choice for our further investments based on the basic theory.
The two week's studying is quite useful and we need to take some further reading about the actual stock market in the moment to comprehend those knowledge.
With regard to the learning content of week4, it is mainly concerned about portfolio theory and Capital Asset Pricing Model. According to the lectures and directed reading, i have learnt a lot from the main concepts and gotten my own understanding about these theories and construction of models. During the development of the portfolio theory in recent several years, it has reached a consensus that there are two types of risks existing in the stock market, one is systematic risk and the other is unsystematic risk which could be diversified away by disperse investment( holding enough differentiating investment as many as possible to reduce the risk of concentrated investment). Through analyzing the expected returns and standard deviations of investments in a portfolio, we could calculate the expected risk-returns of chosen portfolios. Thus, we will compare the risk-returns of different portfolio we could choose and in view of the realistic management status. In the CAPM, the figure of Beta represents the systematic risk and it indicates the sensitivity of particular share to general market movements. Meanwhile, i know that the greater the variety of shares in a portfolio, the more unsystematic risk will be eradicated. Taking the role of investors, we can combine the most efficient portfolio of risky assets with the risk-free asset in order to construct a portfolio which satisfies our risk and return requirements and hence maximizes utility. In my opinion, the CAPM is just a model which builds on portfolio theory, describes a linear relationship between the systematic risk of a security and its required rate of return, which is called' security market line(SML)'. When we choosing the invested portfolios, we could compare those shares by SML and get the best choice for our further investments based on the basic theory.
The two week's studying is quite useful and we need to take some further reading about the actual stock market in the moment to comprehend those knowledge.
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