Financial and Economic Context, minimizing risk
Every single investor is interested in maximizing investment returns while simultaneously minimizing risk subjected to the investment. Consequently, investors prefer committing their resources in receptive economic systems free from uncertainties that may hamper their anticipated returns. In practice, the investors find their desire hard to accomplish given that they are frequently required to deal with emerging constraints arising in the economic and financial sectors. Of great concern here is the price which investors pay in form of hurdles emerging from the economic vicious circle comprising deepened sovereign-debt crisis, slowing economy and fragility in financial institutions. The contemporary business enterprises operate in a complex economic system where multiplicative factors exist in forms of weak public debt sustainability, global pressure in the sovereign debt markets, and the vulnerability of banking sector through sovereign exposures alongside the global recession (Bekx, 2012, p. 4).
It is for the above mentioned factors that countries in the Euro area have devised new measures to respond to the five-year financial crisis. In reality these measures are directed to address the removal of market uncertainties relating to member states, conducting budgetary consolidation and growth in vulnerable member economies, establishing economic firewalls against contagion in the sovereign debt markets, reinforcing the EU banking sector, and strengthening of the euro-area governance framework (Bekx, 2012, p. 11).
[...] R. (2007). Portfolio Management (including Security Analysis). New Delhi: Concept Publishing Company. Bekx, P. (2012). The European Sovereign Debt Crisis and the Future of the Euro. European Commission, Economic and Fianancial Affairs. Clarke, J., Jandik, T., & Mandelker, G. (n.d.). The Efficient Markets Hypothesis. [...]
[...] The government will then privatize the institutions again to enhance liberalization of the economy, and level the playing ground. This restores the investors' confidence when the government conducts regular oversight and enforce quick response to avert systemic crisis witnessed in Spain. Lastly, the government may set up capital injections and guarantee schemes to cover liabilities of financial and investment institutions (OECD p. 9). Bibliography Alajbeg, D., Babies, Z., & Sonje, V. (2012). The efficient market Hypothesis. Financial Theory and Practice, 53-72. Babu, G. [...]
[...] Such market segments act as receptive ground for unethical market agents to exercise unfair market power. This makes it difficult to accomplish market efficiency as information required by other parties is highly restricted. Therefore, some firms will profit when they trade in knowledge obtained from withholding information. Secondly, lack of perfect information on issues regarding market demand and supply forces limit the operations of some firms leading to inefficient markets where few are in the leadership roles yielding monopoly power (Singh & Ellis p. [...]
[...] As a result, financial researchers have identified three versions of EMH. Firstly, the weak form efficiency holds that the current prices of securities will fully integrate all set of information which can be obtained from past history on stock prices. This implies that no single investor will profit from analysing past information regarding the security pricing. This position dispels technical analysis technique adopted by investment analysts in an attempt to study the past sequence of prices. This implies that past stock market prices cannot be used profitably to forecast future prices, clearly rejecting input of technical analyses, which counts on historical price patterns to predict future market movements (Xie p. [...]
[...] Predicting stock price movements in the real financial markets is anticipated by investors to translate into higher returns. However, the level of competition emerging from the number of investors striving to obtain such information leads to immediate adjustment of stock prices before the investor trades on such information. Reflecting on the three versions of EMH earlier identified, it reveals the implication they have on operations in the real financial markets. Firstly, trend analysis is fruitless since the stock prices already reflect all information that an investor can obtain in the history of past trading (Vialar p. [...]
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