CRITERIA FOR THE EFFECTIVENESS OF DEVELOPMENT OF THE REGIONAL SECURITIES MARKET
Serednikov D.A.
The article defines methodological approaches to assessing the efficiency of the regional securities market and proposes a number of practical approaches to quantitatively assessing its effectiveness.
The economic development of the Russian Federation depends on the growth of the real sector of the economy, the establishment of market mechanisms for financing the investment process, therefore, when choosing an option for the influence of the regional securities market on the regional economy, it is necessary to proceed from the socio-economic efficiency of this process. Thus, the problem arises of assessing the effectiveness of the securities market as a mechanism for attracting investment in production development.
When studying the problems of attracting investment through the securities market, domestic researchers rely on efficiency theories created mainly by American scientists based on materials from the American market. But it should be noted that the Russian securities market is developing taking into account national characteristics.
In Western economic literature, two main approaches to considering the problem of securities market efficiency can be distinguished. The first is “...a casino where stock prices are not determined by any objective economic reasons.” Investors are simply trying to guess the actions of other investors regarding the sale of certain securities in the near future and do not take into account their investment value, that is, a prospective assessment of their price level and income on them in the future.
Currently, there are more and more adherents of the point of view of J.M. Keynes, who argued that gambling predominates in the market and that “if Wall Street is looked upon as an institution whose social purpose is to direct new investment..., its success cannot in any way be called the outstanding triumph of capitalism.”
The solution to the problem of the efficiency of the securities market institution partly lies in defining efficiency criteria. Let us note that the criteria reflecting the effectiveness of any type of activity occupy a special place in its characteristics, as they allow us to determine the degree of achievement of the set goal. They consist of quantities that measure the performance of industries (investors) at the level of the economy as a whole. Taking into account all the arguments of Western economists regarding the efficiency of the securities market, it would be necessary to come to a compromise between two views on this problem and talk about the degree of market efficiency. A widespread classification is the degree of market efficiency in relation to certain information, presented by W. Sharp, which is quite organically combined with the position of supporters of institutionalism, who determine efficiency in relation to transaction costs.
The works of Western economists do not provide classifications of the degrees of market efficiency regarding the correspondence of price and investment value to the valuable
paper, from this point of view only an absolutely efficient market is defined. The reason for this is that the basis of this definition is not only quantitative characteristics, but also the qualifications of analysts giving forward-looking estimates. Moreover, security prices in the most efficient markets appear to be unrelated to investment value.
In domestic studies, the efficiency of the securities market is not considered as an economic category; accordingly, neither qualitative nor quantitative approaches to assessing the efficiency of regional markets are given. There are no independent studies devoted to this topic. Therefore, they usually talk not about market efficiency, but about an efficient market, which, in turn, is considered as a key factor in creating a favorable investment climate in Russia, as an institution capable of ensuring an influx of investment into the real sector of the economy, preventing speculative processes. In addition, an efficient market is considered in modern domestic literature as a market in which there is perfect competition, that is, presupposing a plurality of sellers, buyers, information transparency and equality of participants in access to information. The latter approach to defining an efficient market is entirely based on Western efficiency theory, but it does not offer approaches to assessing efficiency, even those based on the same theory.
The results of the analysis of a wide range of methods for studying the stock market (from methods of traditional economic analysis to the modern apparatus of economic-mathematical modeling) showed that the microeconomic approach is most widespread, that is, the result of the impact of securities market institutions on the economy is most often assessed on the basis of profitability indicators individual market participants. This approach reflects the interests of the securities market institutions themselves, but is insufficient from the standpoint of public policy.
In the conditions of a transforming economy, it is important to assess what role the development of the potential of securities market institutions plays in creating conditions for economic growth of the country, district, and region. From our point of view, macroeconomic criteria should be used as the basis for assessing the effectiveness of the development of the regional securities market. However, unlike the previous approach, this assessment method presents significant methodological difficulties.
Analysis of the effectiveness of the functioning of the regional securities market and the real sector of the economy at the regional level is associated with a common problem: effective comprehensive analysis requires reliable information databases. All methods for assessing the securities market are based on an information base, the objectivity of which determines the objectivity of the results obtained. With the transition to the market, the need to objectively reflect the effect obtained and the costs of it, and to realistically assess the increase or decrease in efficiency, has increased significantly. Systematization of existing approaches to the problem of assessing the efficiency of the stock market is the methodological basis for developing our own system of criteria for the efficiency of the securities market at the regional level. This system is based, first of all, on the basic principles of finance theory, methods of analyzing the securities market and investment projects using coefficient, statistical, economic-mathematical and other methods.
Within the framework of the proposed approach to assessing the efficiency of the securities market
region, we have defined a system of criteria that adequately reflect the impact on the level of development of the regional securities market and the investment climate of the region. In our opinion, when assessing the regional securities market, two groups of criteria can be distinguished that determine its effectiveness:
Criteria reflecting the effectiveness of the regional securities market in terms of its investment potential and level of development;
Criteria reflecting the effectiveness of investors' investments in the regional securities market and their social orientation.
The first group of criteria includes the main characteristics of the development of the regional securities market that affect the investment potential of the region:
1) integration of the regional securities market into the national market;
2) the potential of the regional securities market;
3) the effectiveness of investments aimed at the regional economy.
The integration of the regional securities market into the national market has both positive and negative sides. Positive ones are associated with attracting funds from investors in other regions, that is, the expansion of markets for regional securities; negative ones are associated with the outflow of funds from regional investors to other regions.
The main competitors in attracting investment resources for regional issuers are issuers at the national level, since the liquidity of their securities is much higher, that is, transactions with them are carried out constantly, which ensures a certain price level. For the same reason, for securities of regional issuers at the national level, competition problems at the regional level are not of particular importance.
It follows from this that the effectiveness of the integration of the regional securities market in terms of the balance of cash flows passing through it depends on the ratio of the sum of incoming and outgoing flows:
where KEN^ is the efficiency coefficient of integration of the regional securities market into the national market;
RT is the influx of funds into the regional economy through the securities market;
From - the outflow of funds from the region through the securities market.
Accordingly, if KE^ is greater than one, the integration of the regional market into the national one can be called relatively effective.
In addition, it can be argued that, although this coefficient does not fully determine the efficiency of the regional stock market, since it is a reflection of a one-sided approach, nevertheless, it characterizes it quite accurately. The efficiency of the regional securities market, on the one hand, depends on the efficiency of the national market, on the other hand, its efficiency is determined relative to the efficiency of other regional markets, as well as the national market as a whole. A regional market, the integration of which into the national market is effective in terms of attracting investment funds to the regional economy, is relatively more effective than other regional markets, since it is able to attract funds from investors from other regions.
Note that the potential of a developed securities market can be determined by the corresponding capitalization indicator, but there is no methodology for calculating it for a developing regional market. The potential of the regional securities market can be defined as the ability of issuers in the region to attract investor funds into securities, both directly and through a network of financial intermediaries.
The potential of the regional securities market is closely related to the economic potential of the region and is directly dependent on it, and the greater the ratio of the potential of the regional securities market (Ret) and the potential investment opportunities of the region (Pir) approaches one, the greater the degree of investment attractiveness of the region and the securities market functions more efficiently:
kerr-^L,<2>
where KERR is the potential coefficient of the regional securities market;
Ret - investment potential of the regional securities market;
Pir - potential investment opportunities in the region.
For the purposes of efficient use of resources available in the region, it is possible to determine the effectiveness of investments directed into the economy of the region, including those attracted through the regional securities market, and for this it is necessary to calculate a private efficiency index. This calculation is performed by determining the coefficients characterizing the lag of one region from the average level of efficiency in the federal district, based on the goals of public administration. This coefficient is calculated using the formula:
EEK=-(3) KEFmr
where EEFj is the efficiency coefficient of investments directed into the regional economy;
KEFr - the ratio of investments directed into the regional economy to the gross regional product;
KEFmr is the total ratio of investments in the economies of the federal district to its gross regional product.
Next, we will consider the effectiveness of investments from the perspective of various types of investors whose resources are directed to the regional securities market. The second group of criteria will allow us to make such an assessment, which includes indicators such as:
1) efficiency of investments of institutional investors;
2) efficiency of investments of strategic investors;
3) the efficiency of investments of enterprises in the region.
The efficiency of the regional securities market is considered from the point of view of institutional investors, that is, investors interested, first of all, in the dynamics of growth in the value of securities and minimizing risks. Their main goal is to generate income, which is defined as the ratio of income received as interest, dividends, exchange rate differences (speculative income) to transaction costs:
where ERFRi is the effectiveness of regional (shn^au^ed securities from the point of view of institutional
national investor;
/r is the income of an institutional investor received by him on securities (speculative income) on the regional securities market;
77?g - investor transaction costs on the regional securities market.
The efficiency of the regional securities market from the point of view of strategic investors who are interested in business management will differ positively by the ratio of income received from participation in the management of the enterprise and transaction costs of purchasing securities on the regional market:
ESHYA, = +, (5)
where is Esh^Kya! - efficiency of the regional securities market for a strategic investor;
/5/ - the income of a strategic investor received by him on securities on the regional securities market;
1t - income of a strategic investor received from participation in the management of an enterprise;
ТШ - transaction costs of the investor in the regional securities market.
The efficiency of enterprise investments in the regional securities market can be considered from the point of view of assessing the socio-economic effect of market development, which, in our opinion, is the main criterion for the formation of economic policy as a whole. As mentioned earlier, one of the main functions of the regional securities market is to attract investment through securities into the real sector of the economy, and we consider it quite legitimate to talk about the socio-economic results of the development of the regional securities market. When determining the socio-economic result from the development of the regional securities market, it should be taken into account that this result is much broader, but more diffuse compared to the result, for example, from the introduction of new equipment or new technologies. The breadth of the result is due to the fact that the market includes both issuers of securities who attract investment funds through them, and investors and intermediaries who receive income. Therefore, the socio-economic result from the development of the regional stock market, in our opinion, can be divided into three main areas:
The effect from the use of investment resources by enterprises (1La)\ can be represented by the sum of the results from the introduction of new equipment and technologies, from the implementation of environmental programs, and so on. Issuers attract funds to expand their activities, implement investment and social projects and have a beneficial impact on the development of the regional economy as a whole;
The effect of enterprises investing in securities (\Jkivy.) can be determined depending on the use of the income received, namely, where the funds received are directed - for consumption or capitalization. In the first case, we are talking about the primary socio-economic result, expressed in an increase the standard of living of the population. In the second case, we are talking about the future result. Here, both direct and inverse relationships between the general growth of capitalization of the securities market and the growth in the standard of living of the population are clearly visible;
Effect from the development of regional market infrastructure (iMg): according to
In our opinion, it can be identified, like the economic result, with the result from the development of the regional securities market as a whole, therefore, the secondary result from the development of infrastructure is the results from investing in the stock market and the results from the development of the real sector of the regional economy. The primary socio-economic result is the creation of new jobs in the market infrastructure, which in turn should affect the increase in the overall standard of living in the region, the demographic situation and population migration.
Today, it is an axiom that human capital is one of the main driving forces of economic development. At the same time, it is man who increasingly turns out to be the weak link in many processes brought to life by him, and is exposed to dangers generated by new processes and technologies. This gives grounds to include a block of social efficiency as criteria for the effectiveness of the securities market development strategy in order to assess the change in the well-being and well-being of the population of the region.
The socio-economic effect of enterprise investments in the regional securities market can be represented by the following formula:
Tsy+iYu+iYg (6)
where EKRYa is the socio-economic effect of investments by enterprises in the region; IM is the effect of the use of investment resources by enterprises; \Jkiv - the effect of investing in securities by enterprises; iMg - the effect of the development of infrastructure of the regional securities market; TShp - transaction costs for the introduction of new equipment, new technologies, and the implementation of environmental programs at the enterprise. The efficiency of the regional securities market is a causally determined process that operates objectively in all spheres of life. Thus, the assessment carried out using the presented criteria is of decisive importance when considering conceptual and practical issues of increasing the efficiency of development of the region’s investment potential, since, firstly, it allows us to give a clear picture of the mutual influence of the developing local securities market and the region’s economy; secondly, it contributes to the creation of an attractive regional securities market for various types of investors, taking into account the modern needs of the economy and the changing economic environment.
LITERATURE
1. Fischer St., Dornbusch R., Schmalenzi R. M.: Economics. 1999. 353 p.
2. Keynes J.M. General theory of employment, interest and money. M.: Politizdat, 1948. 398 p.
3. Botkin O.P., Garayev M.M. Theoretical aspects of analyzing the effectiveness of regional economic development // Economics of the region. 2007. No. 4. pp. 84-89.
And the effect of a leading indicator. The chapter concludes with a discussion of practical problems associated with legal regulation.
Doesn't this statement seem sweeping? Yes. Therefore, we devote the rest of this chapter to the history, logic, and testing of the efficient markets hypothesis. You may ask why we are starting a discussion of financing problems from this conceptual position, when you have not even received a more thorough understanding of securities, issuance procedures, etc. We chose this path because financial decisions seem insurmountably difficult if you don't know how to ask the right questions. We fear that the confusion will leave you caught up in the myths that often dominate popular literature on corporate finance.
Your uncle enters the conversation, believing that every young man should make his first million by the age of 25. He says you should become involved in the stock market. In his opinion, the best way to get rich is to recognize undervalued financial assets and invest in them. However, your father has heard of some kind of efficient markets hypothesis (EMH), which makes him doubt your uncle's theory
In addition to clarifying some categories, updating digital and factual material, changing the title and structure of some chapters, improving the graphical representation of theoretical models in a number of chapters, and generally the editorial and proofreading necessary for reprinting, new paragraphs and significantly revised chapters appeared in the textbook. This applies to Chapter 8, 3 Mechanism for reducing information asymmetry, Chapter 16, which discusses alternative approaches to take into account the size of the shadow economy, Chapter 21 Securities market with new paragraphs Technical and fundamental analysis of the stock market, Efficient market hypothesis, Theory of reflexivity of J. Soros Chapter 25 with revised paragraphs devoted to models of economic growth by E. Domar, R. Harrod, R. Solow, new paragraphs Models of endogenous economic growth, New Economics and Problems of Growth, Chapter 28 in a new edition. Accordingly, the Subject Index has been updated.
Finally, if, as the efficient market hypothesis states, all prices are correct, then there is no need for the proven need for widespread diversification. An investor who does not like the volatility of returns will only need to select a handful of issues whose changes in yield would cancel out each other. The next conclusion from the hypothesis is the comforting thought that since stock prices are so adequate, it is difficult to obtain a lower return than that given by a certain risk group. The conclusion is very simple. There is no need to assume that markets are efficient and prices are correct. Professional security analysis should be used to verify that prices are correct.
The ability to accurately predict market conditions is problematic, and models developed for this purpose produce unsatisfactory results. Obviously, such models cannot describe a truly efficient market, where all incoming information instantly affects prices. Assuming that the efficient market hypothesis is true and that stock price movements represent a random walk, then neither fundamental nor technical analysis has any basis. Any foreseeable profit opportunity will be exploited long before the analyst makes his calculations. Why do so many intelligent individuals and investment companies continue to make forecasts and make trades against the market? Why do reputable banks spend so much effort compiling and publishing monthly and weekly forecasts of the state of the economy and finances, when the same, if not better results can be obtained with using a random number sensor Why do securities portfolio managers work so hard to select stocks for their portfolio, even though these same people, as individuals, would not play to beat the index (i.e., create an investment portfolio that grows in value faster than average of the entire market)
If we were to poll scientists about the absolute validity of the moderate form of efficiency hypothesis, the votes would probably be evenly divided, but few of those surveyed would be strongly convinced that they were right. In other words, scientists believe that fundamental analysis may sometimes reveal that individual securities are overvalued or undervalued, but in general, security prices reflect all publicly available information. There may be a case of overreaction to new information - in relation to both individual securities. and the market in the center
To describe an understanding of the dynamics of stock prices within the framework of this hypothesis means to assume that price movements do not follow any pattern of behavior, or, in other words, do not depend on each other. To find a theoretical basis for this nature of their movement, researchers developed the concept of an efficient capital market. The main idea behind this concept is that changes in rates always reflect the information available to investors and therefore it is difficult, if not impossible, to constantly “beat” the market itself by choosing undervalued securities in it.
It is believed that the EMH hypothesis in practice can be implemented in one of three forms: weak, moderate, strong. Under the conditions of the first form, stock prices fully reflect the price dynamics of previous periods (this is a continuation of the theory of walking at random), i.e., a potential investor cannot derive additional benefits for himself by analyzing trends. In the second form, prices are determined by all information available to participants. The third form means that in order to determine the true price of shares it is necessary to know some additional information, which exists in principle, but is not equally accessible to all participants. Of the above premises, the last two correspond exclusively to the third form of the EMH hypothesis. Of course, the creation of an efficient market, although possible in principle, is impossible in practice. None of the existing securities markets is recognized by analysts as efficient in the full sense of the word.
Let us note two other difficulties. First, almost any hypothesis test involves the use of theoretical price models to distinguish normal from abnormal conditions. The test is therefore both a test of market performance and a test of the model. Although models are constantly being improved, the results of market efficiency analyzes should be treated as experimental. Secondly, there is no correct price by which to judge a deviation. The price of securities is only a reflection of public ideas about the future, based on available information. If information changes, then prices must also change. An economic crisis in itself does not indicate market inefficiency. Unfortunately, the converse is also true. It is difficult, if not impossible, to prove market efficiency. His real analysis, however, makes sense and consists of assessing the significance of the consequences of decisions made.
The application of the high form of market efficiency hypothesis to accounting is that, while fulfilling a social function, accounting should make relevant financial information publicly available as quickly as possible in order to minimize the possibility of using confidential information. When such information is used for the benefit of some, other participants in the market lose, i.e. there is a transfer of values from one investor to another. And because prices do not immediately reflect this information, the allocation of resources may not be optimal. In addition, in this case, private investors cannot correctly evaluate securities, which is necessary for the formation of optimal securities portfolios.
At present, apparently, it is too early to talk about some kind of coherent economic and mathematical theory of the financial market as a “large complex system” operating not in “classical” equilibrium conditions, but in those that are actually observed in the market. The current state can be defined as a period of “accumulation of facts” “refinement of models” And in this sense, the primary role belongs to new methods of collecting and storing statistical data, their processing and analysis using, of course, modern computer technology (which will be discussed below, see . Chapter IV), which provides empirical material for the analysis of various concepts regarding the functioning of the foam paper market and the correction of various provisions included, say, in the concept of an efficient market, hypotheses regarding the nature of price distributions, the dynamics of their behavior, etc.
A similar breakthrough in investment research occurred in the 1960s, when the Center for Securities Research at the University of Chicago first published a reliable and comprehensive database of daily stock price movements of American companies from 1926 to 1960. After this event, securities analysis began to develop rapidly. The researchers' contributions to the analysis of investment portfolios derived from these data, to corporate capital structure, option pricing, research into the efficient market hypothesis and rational choice theory are well known and have received Nobel Prizes. You can read about this in any standard university textbook.
One of the main assumptions of the Black-Scholes model is the assumption of random price movements. The model is based on the "efficient market hypothesis", according to which stock prices fully reflect the knowledge and expectations of investors, therefore trending stocks do not exist (stocks moving in the same direction with the main trend of the market, and their price fluctuations are interrelated). Consequently, securities with large price fluctuations on the market can coexist with securities showing a high degree of stability.
As noted in the section on the efficient markets hypothesis, managers generally do not have any additional information not available to others about either the general state of the stock market or the future level of interest rates, but they are usually better than outside observers. informed about the prospects of their own firms When a manager knows more about the future of his firm than the analysts and investors observing it, asymmetric information exists. In this case, the managers of the firm can determine, on the basis of private information available to them, that the price of stocks or bonds of their company is overvalued or undervalued. Of course, there are varying degrees of asymmetry—a firm's management is almost always better informed about its prospects than outside observers—but in some cases this difference in information is too small to influence the actions of managers. In other, less frequent cases—for example, on the eve of a merger announcement or when the firm has achieved some major success in research and development—managers may have confidential information that, if made public, would significantly change the price of the firm's securities. 27 In most cases the degree of information asymmetry is somewhere in the middle between these two extremes
This chapter brings together elements of the theory of fractals, previously scattered. We have found that most capital markets are in fact fractal. Fractal time series are characterized as processes with long-term memory. They have cycles and trends and are the scourge of nonlinear dynamic systems, or deterministic chaos. Information is not immediately reflected in prices, as the efficient market hypothesis states, but, on the contrary, exhibits a bias in profits. This displacement extends forward indefinitely, although the System may lose memory of the initial conditions. The American securities market maintains a four-year cycle; in the economy it is five years. Every time
James Laurie, Peter Dodd, Mary Hamilton1 and many others have noted that efficient market theory presents a curious paradox. The hypothesis that
An efficient market is a market where security prices always and fully reflect all available information that determines their value. In an efficient market, investment strategies that seek to “beat” a broad stock market index will not consistently generate high returns after adjusting for (1) risk and (2) transaction costs.
Numerous studies have been conducted on the topic of stock market price efficiency. However, we do not intend to give a comprehensive review of these studies in this chapter and can only summarize the main results and their implications for investment strategies.
Forms of effectiveness
There are three different forms of price efficiency: (1) weak, (2) semi-strong, and (3) strong. The differences between these forms are based on the relevant information that is believed to always be reflected in the price of the securities. Weak form implies that the price of a security reflects all of its past prices and trading history. Semi-strong form means that the security's price also fully reflects all public information (which, of course, includes, but is not limited to, past prices and trading patterns). The strong form exists in a market where the price of a security reflects generally all information, whether it is public or known only to insiders such as top managers or company directors.
There is empirical evidence that developed equity markets are weak-form efficient. They arise from numerous complex tests that examine whether, based on historical price movements, future prices can be predicted to produce returns above those expected from a risky class of securities. Such “abnormal” incomes are called positive abnormal incomes or simply excess incomes.
As a result, investors who follow strategies for selecting securities solely based on price movement patterns or trading volume—such investors are called technical analysts or chartists—are unable to beat the market. In fact, they should be struggling because of the high transaction costs associated with the frequency of buying and selling shares.
The rationale for semi-strong form price efficiency is controversial. Some pro-efficiency research suggests that investors who select stocks based on fundamental security analysis (including analysis of financial statements, management quality, and a company's economic position) will not outperform the market. There are reasons for this, of course. There are so many analysts applying the same approach based on the same public data that all of that data is already reflected in the stock price. However, a significant number of studies prove that there are examples and patterns of price inefficiency in the stock market over long periods of time. Economists and financial analysts often refer to these examples of price inefficiencies as market anomalies, i.e. phenomena that cannot be explained in accordance with accepted theory.
Practical experiments with strong form price efficiency can be divided into two groups: (1) studies of the performance of professional investment managers and (2) studies of the performance of insiders (insiders who are company directors, senior executives, or large shareholders). The study of professional investment managers to test strong form price efficiency was based on the view that professional managers have access to better information than the general public. This is a controversial statement, since statistical data shows that professional managers have failed to systematically beat the market. In contrast, evidence of insider activity has shown that this group generally achieves higher risk-adjusted returns than the stock market. Of course, insiders would not be able to consistently earn such high abnormal returns if stock prices fully reflected all relevant information about the value of companies. Thus, the pattern of insider success argues against the strong-form market being efficient.
Investing in common stocks
Strategies for investing in common stocks can be divided into two groups: active and passive. Active strategies are those that attempt to beat the market based on one of the following factors: (1) timing of transactions, as in the case of technical analysis, (2) identification of undervalued or overvalued stocks based on fundamental analysis of securities, or (3) selection shares in accordance with one of the market anomalies. Obviously, the decision to pursue an active strategy must be based on the belief that some benefit will be obtained from all this costly effort. However, income is possible only if price inefficiency exists. The choice of a particular strategy depends on why the investor believes it exists.
Investors who believe in the efficiency of stock market prices must accept the fact that they will not systematically beat the market unless they are lucky. This doesn't mean investors should avoid the stock market. Rather, it suggests that they should follow a passive strategy that does not attempt to beat the market.
Is there an optimal investment strategy for those who are convinced of the price efficiency of the stock market? It really does exist.
The theoretical basis of this strategy is based on modern securities portfolio theory and long-term capital market theory. According to modern portfolio theory, the market portfolio provides the highest level of return per unit of risk in a price efficient market. A portfolio of financial assets with characteristics similar to those of a portfolio consisting of the entire market - the market portfolio - will reflect the price efficiency of the market.
But how to implement such a passive strategy? In other words, what is meant by a market portfolio and how can this portfolio be formed?
In theory, a market portfolio consists of all financial assets, not just common stocks. The reason for this is that investors, when investing their capital, analyze not only stocks, but also all investment opportunities. Thus, our investment principles should be based on capital market theory, not just stock market theory.
When the theory is applied to the stock market, the market portfolio is defined as a portfolio consisting of a huge space of common stocks. But how many common shares of each type should you buy when compiling a market portfolio? The theory states that the chosen portfolio should be an appropriate proportion of the market portfolio. Therefore, the weight of each stock in a market portfolio should be based on its relative market capitalization. Thus, if the total market capitalization of all the stocks included in the market portfolio is $G, and the market capitalization of one of these stocks is $D, then the share in which this stock should be included in the market portfolio is equal to $A/$T.
The passive strategy we just described is called indexing. In the 1990s. A growing number of pension fund sponsors were becoming convinced that money managers were unable to beat the stock market. Since then, the number of funds managed using an index strategy has grown significantly.
An efficient securities market is formed if investors have extensive and easily accessible information and all of it is already reflected in the prices of securities. The concept of an efficient market was developed based on the works of Maurice Kendall, who in the early 1950s. found that changes in stock prices from period to period are independent of each other. Before this, it was assumed that stock prices had regular cycles. Research has shown that, for example, the correlation coefficient between the price change of any day and the day following it is hundredths. This indicates a slight trend, such as further price increases following the initial increase. Independent price behavior is to be expected only in a competitive market.
According to the efficient market hypothesis, it is impossible to make accurate forecasts of price behavior. According to this hypothesis, the high efficiency of the securities portfolios of some firms compared to others is explained not by the competence of managers, but by pure chance.
Based on the US stock market crash that began on October 17, 1987, six lessons on efficient markets have been developed)
