Macroeconomic Principles Efficient Market Hypothesis, Increase in Wages, Savings Effect on Living Standards.
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Macroeconomic Principles: Efficient Market Hypothesis, Increase in wages, Savings effect on living standards.
Principles explained using these 3 pointers:
1. Describe the efficient market hypothesis and give a piece of evidence consistent with this theory.
2. The cleaning service firm CleanAll plc increased its worker’s wages by 4%, and it experienced an increase in its profits. How can this have happened?
3. Does an increase in savings lead to a higher standard of living? Why? Why might a politician prefer not try to introduce measures to increase the rate of saving?
1. The efficient market hypothesis is a theory that states the market outcome is impossible to predict. In this case stocks are valued according to all the publicly available information about the asset. This means that the value of the asset is rationally valuated concerning all known knowledge disregarding future speculation about the asset. This causes stocks to follow a random walk style whereby it is impossible to predict what fluctuations are going to occur in the stock price due to the unpredictability of future news. In this scenario no stock is better or worse than any other stock because if it is impossible to predict what can happen then any share could possible rocket or plunge at any time. In any case you are better off putting your investment in a diversified portfolio. Evidence to back up the efficient market hypothesis is Tracker trusts. These are investment funds set up to purchase all the shares in a given stock index (an example of diversified portfolios). When compared with a British firm over a 20 year investment period the Tracker trusts outperformed these financial investors in 80% of the investments. This showed that even so called professionals could not properly predict what would happen to the shares. This illustrates that having a diversified portfolio of stocks and that having random stocks has a far better chance of having a return than trying to predict...
Principles explained using these 3 pointers:
1. Describe the efficient market hypothesis and give a piece of evidence consistent with this theory.
2. The cleaning service firm CleanAll plc increased its worker’s wages by 4%, and it experienced an increase in its profits. How can this have happened?
3. Does an increase in savings lead to a higher standard of living? Why? Why might a politician prefer not try to introduce measures to increase the rate of saving?
1. The efficient market hypothesis is a theory that states the market outcome is impossible to predict. In this case stocks are valued according to all the publicly available information about the asset. This means that the value of the asset is rationally valuated concerning all known knowledge disregarding future speculation about the asset. This causes stocks to follow a random walk style whereby it is impossible to predict what fluctuations are going to occur in the stock price due to the unpredictability of future news. In this scenario no stock is better or worse than any other stock because if it is impossible to predict what can happen then any share could possible rocket or plunge at any time. In any case you are better off putting your investment in a diversified portfolio. Evidence to back up the efficient market hypothesis is Tracker trusts. These are investment funds set up to purchase all the shares in a given stock index (an example of diversified portfolios). When compared with a British firm over a 20 year investment period the Tracker trusts outperformed these financial investors in 80% of the investments. This showed that even so called professionals could not properly predict what would happen to the shares. This illustrates that having a diversified portfolio of stocks and that having random stocks has a far better chance of having a return than trying to predict...