Investors and their perception of the value that a company adds to society changes instantaneously through time.

Discussion

Investors and their perception of the value that a company adds to society changes instantaneously through time. The frequency of these changes and the speed at which new information affects the value of securities led Professor Eugene Fama to actually articulate the three forms of market efficiency so that academics could test whether markets are efficient. There are some researchers who claim that although markets are efficient for the most part, there is some evidence that markets are not entirely efficient and that investors fall prey to certain behavioral biases which affect pricing in the markets (see Professor Richard Thaler’s research). The Capital Asset Pricing Model (CAPM) is a tool that financial practitioners use to relate the market’s perception of risk to an individual firm’s value and an investor’s required rate of return on a stock. For this discussion, you are required to first discuss the concept of market efficiency and its limitations and, second, provide an example of a publicly-traded company, its ‘beta’ (hint: go to https://finance.yahoo.com/lookup and type the symbol or ticker of the company that you are looking for), which is a proxy for its systemic risk, explain what that beta implies in regards to other companies in its industry or the market as a whole, and note some of the limitations that are associated with that metric.

Recommended Reading

Fama, E. and French, K. (1996). The CAPM is Wanted, Dead or Alive. The Journal of Finance, 51(5), 1947-1958.
Fama, E. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49, 283-306.
De Bondt, W. and Thaler, R. (1995). Financial decision-making in markets and firms: A behavioral perspective. In Jarrow, R., Maksimovic, V. and Ziemba, W. (Eds.), Handbooks in Operations Research and Management Science, 9, 385-410. Retrieved from – https://faculty.chicagobooth.edu/Richard.Thaler/assets/files/Financial%20Decision-Making%20in%20Markets%20and%20Firms%20A%20Behavioral%20Perspective.pdf

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Investors and their perception of the value that a company adds to society changes instantaneously through time.

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