Tell How Your Understanding of Efficient Markets Helps with Investing

question 294

Essay

Tell how your understanding of efficient markets helps with investing.

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Definitions:

Security Market Line

A representation in the capital asset pricing model (CAPM) that displays the relationship between the expected return of a security and its systemic risk.

Beta

A statistic that measures the volatility of a stock or portfolio compared to the market as a whole, used in the CAPM to calculate cost of equity.

Systematic Risk

The type of risk inherent to the entire market or an entire market segment, which cannot be mitigated through diversification.

Correlated Changes

Refers to situations where two or more variables move in relation to each other.