CASE 4-2 Supply and Demand

INSTRUCTIONSYou are to follow the case instructions in the text as you complete your selected case. Items to include are outlined as follows: 500 words in length that addresses all of the criteria for the selected case. Your assignment must be in current APA format.  You must support your assertions with at least two citations. In addition, you will provide a biblical application for the subject matter of the case.  Acceptable sources include peer-reviewed journal articles, FASB Codification, the textbook, and the Bible. Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.

ASE 4-2 Supply and Demand INSTRUCTIONS You are to follow the case instructions in the text as you complete your selected case. Items to include are outlined as follows:  500 words in length that ad

This study source was downloaded by 100000793288509 from CourseHero.com on 03-17-2022 12:48:42 GMT -05:00 https://www.coursehero.com/file/34626224/CASE-42-Module-Week2docx/ CASE 4 ‐ 2 Supply and Demand The efficient market hypothesis is an extension of the supply and demand model.

The efficient market hypothesis (EMH.) is an extensively criticized theory that supports the concept that securities markets are really efficient in representing the information on stocks and the stock market. Once some information was available, it would directly affect the prices of the securities. As a result, studies on stock prices run by analysts such as the technical analysis and the fundamental analysis would not benefit an investor’s any higher returns than anyone else who randomly picked individual stocks (Malkiel, 2003).

In fact, if the prices are affected by the day’s news, and news are unpredictable, then the stock prices are unpredictable. Thus “ even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by experts” (Malkiel, 2003).

a Discuss the assumptions of the supply and demand model inherent in the EMH.

In order to identify the correlation between the assumptions of supply and demand and EMH, it is important to define the assumptions of perfect competition, on which the efficient market is based. Perfect competition relies on different assumptions (Fakhry, 2016):

 The number of buyers or sellers is large, therefore the price will not be affected by one buyer or one seller.

 The buyers and sellers have complete and perfect knowledge of the market prices.

 All the factors of productions such as goods and services can be employed in other industries, that is, there is perfect mobility among them.

 There are no limitations or restrictions on buying and selling as long as it is at the market price, avoiding special deals and discounts.

b Why is the securities market viewed as a good example of the supply and demand model?

The securities market is a great example because it reflects the reactions of buyers and sellers to the information available. The information is received through different channels such as financial statements, quarterly earnings reports, competitor’s financial information, released through news media, contract awards announced by the government and private contractors etc. ( Schroeder et al., 2017). As soon as new information is available, the market reacts to it.

c Discuss the three forms of the EMH.

Weak Form : according to this form, the market is efficient reflecting the information coming from the market and the historical prices do not influence future prices. If this form were correct, an investor could make decisions on securities based on their past performance and not by utilizing information provided by analysts. In addition, an investor could simply select the portfolio of securities by randomly looking at those with This study source was downloaded by 100000793288509 from CourseHero.com on 03-17-2022 12:48:42 GMT -05:00 https://www.coursehero.com/file/34626224/CASE-42-Module-Week2docx/ Powered by TCPDF (www.tcpdf.org)past high performance. This form is called weak as it relies on readily available information that anyone can get.

Semi-strong Form : because the forms are all based on the level of information provided, the semi-strong form implies the market to be efficient regardless of all publicly available information. Publicly available information is not as strong and investors cannot get great returns based on it because it has already been used to establish the securities price. Strong Form:

Schroeder, R. G., Clark, M., & Cathey, J. M. (2017). Financial accounting theory and analysis: Text and cases (12th ed.). Hoboken, NJ: Wiley.

FAKHRY, B. (2016). A literature review of the efficient market hypothesis. Turkish Economic Review, 3(3), 431-442.

doi:http://dx.doi.org.ezproxy.liberty.edu/10.1453/ter.v3i3.928 Malkiel, B. G. (2003). The efficient market hypothesis and its critics. The Journal of Economic Perspectives, 17(1), 59-82. doi:10.1257/089533003321164958