Advanced Investment and Theory Assignment Example | Topics and Well Written Essays - 2000 words

Advanced Investment and Theory - Assignment Example This brings about the price movements in the direction of the current value of the cash flows in the future. An efficient capital market is the one that incorporates information accurately and in a steady manner into the security prices (Kleinbrod, 2006, Pg. 78). The weak-form efficient capital market is reached after the information regarding the history of previous returns and prices are fully reflected in the security prices. In such markets, the stock returns are unpredictable. The semi-strong-form efficient market is realized whereby, the public information is completely reflected in security prices. In the particular market, traders who have non-public information access may earn excess profits. In the third type of efficient market, the strong form, investors can under no circumstances, earn excess profits since every bit of information is incorporated into the prices of securities. The funds that flow from the capital markets, originating from savers to the firms aiming to finance projects must also flow into the best and highly valued projects. In this case, information efficiency is of great significance. Stocks must have efficient prices. If securities were accurately priced, the investors who lack time for market analysis would ga in confidence about making investments in the capital market (Moyer et al.2009, Pg.8). The efficient markets theory of financial economics explains that the price of a product reflects all available relevant information about the fundamental value of the product. Although the theory applies to every type of financial security, its discussion is mostly focused on one type of security, shares of common stock. The encyclopedia of economics states that financial security stands for a claim in future cash flow. Therefore the fundamental value of the product is the present value of the cash flow that is expected by the security owner.