Tuckzedo 007

Lauren HirschShavonne HowardDarius LiCarlos MendezAvraj SandhuNathan Walsh

EFFICIENT MARKET THEORY

Develops from a study conducted by French mathematician, Louis Bachelier

Oui, I conclude that the past performance of stock returns have no statistical implication on their future performance. Ooh la la!

Led to idea of the Random Walk, which means you cannot predict the stock market’s returns by looking at its past returns

A Theory Evolves…

In 1970, Eugune Fama penned:

The Efficient Capital Market Thesis: Not only can you not predict the market based on past returns, you also can’t predict it by any other complex means of analysis. All available information is imbedded into the price of a stock

The variations of efficiency:

1) Weak

2) Semi-strong:

3) Strong

An investor cannot “beat the market.” There is no way for him/her to know something about a stock

that isn't already reflected in the stock's price.

The Stock Market is fair and RATIONAL

Underlying Premise

But, do rational objects ever look like this?.....

Analyzing the Efficient Market Theory in the

context of the Vix and the 2008 Stock Market Crash

What is Vix ?

What is Vix?

What is Vix?

Introduced in 1993, VIX is the ticker symbol for the Market Volatility Index, which trades on the Chicago Board Options Exchange

It measures how much investors think the S&P will vary over the next 30 days

Otherwise known as…

The Fear IndexInvestors adverse to volatility do NOT like a high

Vix

Understanding Vix Mathematically

Weighted average of puts and pulls

Expressed in terms of percentage change on an annual basis, so – if VIX is 15, this represents an

expected annualized change of 15% over the next 30 days

In 2008, uncertainty in the market led to a skyrocketing Vix Index

1) In October 2008, stock prices were low and dropping; investors were very fearful and willing to pay a lot to protect themselves against their downward movement2) Vix generally moves inversely with S&P 5003) Only other comparable spike was in 2000 after dot.com bubble burst

Some people see the stock market crash of 2008 and its associated volatility as disproving the Efficient Market Theory:

1. Not Random?

2. Not Rational?

3. Mass psychology ?

Relating Vix Back to the Efficient Market Theory

….The answers?

Up to you to decide!!!

Great topic for a first date

Whether or not you take credence in the Efficient Market Theory, it still plays a role in society today

On shows such as Jim Cramer’s Mad Money, we see its impact…

LAST NIGHT ON JIM CRAMER….

Cramer’s Recommendations

Gold: BUY!! Bernanke is producing a lot of greenbacks that it devaluing the dollar; make

money off of this by buying gold!!

CTEL: BUY! City Telecom HK - Changing strategy: raising price for “triple play service”; representing a growth in dividend play; free cash flow is expected

to double

CISCO: Sell !!! It’s too big and they haven’t gotten their act together. However - doesn’t think their weak plunging prices are

indicative of the technology market on the whole

Lightning round: Terra Nitrogen – BUY!; DineEquity - BUY! Panera –BUY! Chipotle – BUY!; TransGlobe – speculative, but

buy!

Why do we care?

The show’s premise is to provide information to investors, so they can make wise investment decisions. Even the commercials, such as GM and Vanguard, are informational.

This objective is in accordance with the Efficient Market Theory; it presents the stock market as an open and fair platform, determined only by information.

THANKS, AND HAVE A GREAT DAY !!