Explain the concept of efficient markets. Are the equity capital markets inefficient?

Bond Rating Agencies’ Practices
Wk3-1 Bond Rating Agencies’ Practices
Bond rating agencies have invested significant sums of money in an effort to determine which quantitative and non quantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get non public information that is used in assigning the issue’s bond rating. In order to recoup those costs, some bond rating agencies have tied their ratings to the purchase of additional services.

Discussion Questions

Do you believe that this is an acceptable practice? Defend your position.
What is the impact of this practice on the capital markets?
What other means can rating agencies use to raise revenue to fund their operations?

Efficient Market Hypothesis
Wk3-2 Efficient Market Hypothesis
Many professionals regard the equity markets to be a bit like Las Vegas. That is, it’s possible to win big if you take high risks, but the odds are in favor of the casinos. In the case of the equity markets, it’s possible to beat the stock index funds if you take the risks, but the odds are against it.

Discussion Questions

1) Explain the concept of efficient markets. Are the equity capital markets inefficient?
2) What is the role of accounting in an efficient market?
3) Is it worth investing the time and money to beat the market? Does it help to conduct financial statement analysis? Should you time the markets?

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