Finance School of management Market Price fundamental value ORS Pharmaceuticals Corporation How is the stock market reacting to the information? Announcements of good news: QRS research scientists have just discovered a drug that can cure the common cold Announcements of bad news: A judge has just ruled against Qrs Pharmaceuticals in a lawsuit involving the payment of millions of dollars in compensation to customers who bought one of its products uesTc
6 Finance School of Management Market Price & Fundamental Value — QRS Pharmaceuticals Corporation ❖ How is the stock market reacting to the information? – Announcements of good news: QRS’ research scientists have just discovered a drug that can cure the common cold. – Announcements of bad news: A judge has just ruled against QRS Pharmaceuticals in a lawsuit involving the payment of millions of dollars in compensation to customers who bought one of its products
Finance School of management Efficient Market Hypothesis (EMH) An assets current price fully reflects all publicly available information about future economic fundamentals affecting the asset's value uesTc
7 Finance School of Management Efficient Market Hypothesis (EMH) ❖ An asset’s current price fully reflects all publicly available information about future economic fundamentals affecting the asset’s value
Finance School of management How Does the market pool the information pieces A typical analyst-investor 's decision making Collecting the information orfacts Determining the best estimate(expectation) P(1) 1 P(0) Determining the extent of dispersion around the estimate(risk) Risk-return trade-off, budget limitation and investment decision or recommendation uesTc
8 Finance School of Management How Does the Market Pool the Information Pieces — A typical analyst-investor’s decision making – Collecting the information or ‘facts’ – Determining the best estimate (expectation) – Determining the extent of dispersion around the estimate (risk) – Risk-return trade-off, budget limitation and investment decision or recommendation 1 P(0) P(1) r = −