Efficient Securities Market
Efficient Securities Market
Efficient Securities Market
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EFFICIENT SECURITIES
MARKETS
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CAPM
E(Rjt) = Rf(1 - βj) + βjE(RMt)
Market sets share price so that expected return E(Rjt)
(i.e., firm’s cost of capital) is given by right side of
equation
Note that only firm-specific component is ßj
How is expected return defined? See Equation
(4.2) in text:
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Information Asymmetry
Inside information
• Information about the firm that is not publicly available
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