Efficient Markets Hypothesis Essay Example | Topics and Well Written Essays - 1000 words

Efficient Markets Hypothesis - Essay Example The essence of the efficient markets hypothesis evolved from an earlier capital assetpricing model or CAPM based on investors’ unobservable beliefs about future returns. The CAPM predicts a linear relationship between the expected rate of return on an asset and that asset’s systematic risk, often termed â€Å"beta.† The CAPM model in turn led to the arbitrage pricing theory which is more general than the CAPM by including a set of unspecified factors which influence capital valuations. The CAPM in turn has been expanded into a broader format including such factors as the size of the company and the ratio of book value to market value; this version has gained wider support over the past ten years (Negakis, page 3). The efficient market hypothesis, as defined by Fama going back to 1970, â€Å"defines an Efficient Market as the one in which ‘security prices fully reflect all available information’†. Fama, in 1970, identified three forms of Market Efficiency. In the weak form, no investor can expect to gain from analyzing historical data as that data would already be reflected in capital asset prices. In the semi-strong form, no investor can expect to gain from analyzing publicly available information for the same reason. In the strong form, no investor can expect to gain from analyzing information from any source (Negakis, page 3). The efficient market hypothesis requires the existence of a highly-competitive market. with a large number of very-well-informed traders and in which transactions are costless. It would then not matter how many shares or other capital assets a trader sells - the price would remain unaffected by his actions as the market would already have taken them into account. The market would already reflect all available information, which would be included automatically in the price of the shares or other assets under consideration. The advent of portfolio theory has strengthened the efficient market hypothesis by focusing 3 on the valuation of an entire portfolio of many securities rather than on each one's value. In a fully-diversified portfolio, the trader or investor need not be as concerned over each security or capital asset but rather on the risk and return of the total range of those assets. According to Fama, the strong version of the efficient mar

Financial Accounting Concepts Essay Example | Topics and Well Written Essays - 500 words - 5

Financial Accounting Concepts - Essay Example The higher the current ratio the greater is the company’s ability to pay its bills. It is also a tool which also helps make rational decisions in keeping with a company’s objectives. This is the reason why the bank insisted that they maintain a current ratio of 1.5. This would also enable the bank to keep a track on the company’s functioning. The accounting principle relevant here is conservatism. Conservative accounting can only cause temporary increase in the company’s earnings. The effect is temporary and the actual may differ and hence not considered a good indicator of subsequent earnings. Conservative accounting would raise questions about not only the balance sheet but also about the income statement. Accounting conservatism only helps to reduce disclosure. According to me it would he unethical to record the revenue of the new sales contract in December. It is always advisable to be honest with the bank because the relation with a bank is a long-term one. If the bank found out on its own it would reflect badly on the company and then the bank would be very cautious in all future transactions also. Manipulation may not be intended by the company but banks would be cautious in all future reporting by the company incase they found out. If the company records this revenue in December the current ration would increase. They could complete the contract in December itself and raise the bill. Once the bill is raised, whether they receive cash for it or it remains as current receivables, the current ratio goes up. In this case there is nothing wrong. But as can be seen it is already the 15th December. Would it be possible to complete the contract within this period? Besides, credit has to be given to the party so cash payments cannot be expected. But in the event that the contract is executed in January and considered in December just for the sake of reporting, it would be a false