The problem tackles how horse traders answer to the natural question: "if he, or she wants to sell a horse, do consumers truly want to purchase it?" Such questioning is essential to the market for used cars and…
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The lemons problem, in the investment field, is noticeable in areas such as corporate finance and insurance (Mishkin 420).
The lemons problem is essential in business as it clarifies those who are overexploited, in business dealing, and those who are not (Akerlof 1). Information asymmetry occurs when parties to a transaction lack the same degree of information essential to formulate an informed decision. For instance, in the market for used vehicles, the purchaser mainly cannot establish the value of a car accurately and might, therefore, just be willing to pay a minimal price for the car (Akerlof 1). This is somewhere between the premium price and the bargain price (Mishkin 434). Nevertheless, this tilts the proceedings in favor of a lemon vendor. This is because, even as the normal price for this lemon would be higher than the value it would command, the purchaser knew beforehand that it was, in fact, a lemon (Mishkin 435). Also, such a happening puts the seller of a proper used car at a disadvantage, as the best price a vendor can expect is an average price, but not the premium price the vehicle should
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The author states that three types of efficient markets are based on certain assumptions and certain hypothesis. The weak-form efficient market hypothesis is based on assumption that current prices of stocks represent the full historical information. The technical analysis would not yield superior risk-related amounts of returns.
“A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits by using this set of information to formulate buying and selling decisions”, and such market is called efficient market. Efficient Market Hypothesis postulates that stocks will always be traded at fair value, meaning all the factors both positive and negative are fully factored in the stock prices at all times.
Related to these practices is the understanding that their occurrence is directly connected to the regulatory environment that allowed for their occurrence. The drastic deregulation that occurred during this period is in part linked to a theoretical belief in market efficiency, as policymakers have been accused of having too great a faith that the market would undergo self-correcting behavior.
Hence, the EMH is of little relevance to corporate managers.’ Explain and discuss this contention. The efficient market hypothesis is a proposition which articulates that the market prices of security are a reflection of available information to the members of public.
Basu illuminates that "in an Efficient Capital Market security prices fully reflect available information in a rapid and unbiased fashion" (1977, p663) This suggests that stock price, at a specific moment, reflects all the information that is available and the events that are announced.
It states that the financial markets are usually efficient in terms of providing the right information to the investors.
It also stipulates that the price of traded assets consists of information that is available for use. The example of traded assets involves; stocks, bonds and the properties.
Indeed, there were several theories and models develop to further increase the understanding on financial markets. The knowledge, however, is subject to various criticisms and judgement. Such process allows the models and theories to be meticulously developed before being accepted.
Investors will therefore make normal profits. According to this hypothesis, any new information that can influence the prices of securities will spread randomly to all investors. The weak form hypothesis argue that the