Financial Markets and Monetary Policy †MyAssignmenthelp.com

Question: Discuss about the Financial Markets and Monetary Policy. Answer: Introduction: Efficient Market Hypothesis refers to a conjecture within the financial economics that describes that the price of an asset totally reveals all the information that is available from the asset. It is seen that a direct inference is that, it is unfeasible to overcome the market every time on the basis of the risk adjusted as the prices in the market only responds to the fresh data or information and the transformations in the rate of discounts (Burton and Shah 2017). It is seen that the rate of discount can be estimated or may be capricious. The model was constructed by Professor Eugene Fama Management, who made an argument that the stock always try to operate at their fair value and thus makes it unfeasible for the investors to either trade on the stocks that are undervalued or trade off the stocks for a higher price. Therefore, it is seen that it becomes almost impossible to surpass the whole market through expertise selection of stock or even the timing of the market and that the best process an investor can probably gain increased profits or returns is with the help of the opportunity or by buying certain investments that are very risky (Suliman 2017). The study undertaken by Bodie (2013) makes a confirmation about the explanation that has been discussed in the paper and reveals that the allocation of the returns that are abnormal in nature of the any mutual funds that are very alike to expectation that there are no fund managers who possess the skills that are a mandatory aspect for holding an Efficient Market Hypot hesis. It is seen that there are three types of Efficient Market Hypothesis namely, Weak, Semi-strong and Strong. The three types of Efficient Market Hypothesis are discussed below: The Efficient Market Hypothesis that is weak in nature reveals that one cannot forecast the prices of the future stock by looking at the previous stock prices. The Weak form Efficient Market Hypothesis is an attempt that directly aims at the technical analysis. It is seen that if the previous stocks are not able to forecast the prices of the future stocks, then there is no option of observing them and no points of making an attempt to discriminate the trend in the chart of the stocks. Gandhi et al. (2013) reveals that most of the studies reveal that the weak form of Efficient Market Hypothesis stands up well as they have the ability to create an abnormally increased rate of returns. Efficient Market Hypothesis that is in the nature of being semi-strong reveals that it cannot make use of any discovered information to forecast the future prices of stock. Efficient market Hypothesis that is semi-strong in nature aims at the fundamental analysis. It is seen that if all the information that have been published is reflected on the prices of the stock, then it is seen that nothing can be achieved by observing the financial reports or by paying anybody like the fund managers (Frahm 2014). This form market hypothesis even stands up pretty well as it is seen that for instance, a variety of active fund managers who surpass the market has traditionally has no more power than to simply feature the clear randomness of the prices of the stock. This form of market hypothesis does not look to be an ironclad but it is seen that there exists a handful of investors who have overcome in this market by an adequate level and thus it becomes extremely hard to forecast that whether it is just for luck or not (Graziani 2015). The strong nature of Efficient Market Hypothesis reveal that all the information is known and can be known and even the information that have not been published are even seen in the current stock prices (Hu 2014). The inference in this case would be that even if some internal information is known and can therefore be traded legally by looking into it, there would be no gain by trying to do so. Narayan et al. (2015) reveals that the strong nature of Efficient Market Hypothesis is not specific to most of the investors as it is rare that the investors do not have data or information regarding any current and future stock prices in the share market. In this question it is revealed with the help of the diagram that how the investors react in the market before and after the establishment of an innovative and newly constructed product that may revolutionise the international market. The diagram suggests that the market where the product is launched is efficient but however, it is seen that there is a variance in the reaction of the investors at various levels before and after the establishment of the product that have explained with the help of lines in the diagram. It is seen that in Line 1, that depicts the characteristics of the investors just after the announcement date. In this case, it is seen that the share prices of the product starts to rise as the investors have started to estimate the product and the future prices of the product as they feel that this product would be highly demanded in the market (Westerlund and Narayan 2013). Therefore, it is seen that with the increase in the speculation, the share prices start to rise gradually showing that there is an improvement in the share market. Line 2 in the diagram reveals the condition of the investors and the share prices before the announcement date of the new product. It is seen that before the new product was announced, the market was operating in its own way and therefore, no changes and introduction of new products revealed that the prices of shares were going down as the economy of the market remained same and functioned in the ordinary way (Fievet and Sornette 2016). The investors are always looking for a kick in the market due to any external and internal factors that that can jump the market with a rise in the prices of the stock. However, prior to the announcement of the product there was no information available to the investors that would help them to speculate the market. It is seen that the prices of the share slowly tend to increase as the date of announcement closes in revealing that the investors have knowledge about the announcement of a new product. Line 3 in the diagram reveals the situation when the announcement is made regarding the new product. During the announcement of the new product, the price pf shares in the market leaps up to the highest as the shareholders have new information regarding a product and they start speculating that this product may improve the lifestyle of human beings and therefore the demand for the product will be extremely high (Duncan et al. 2017). The introduction of a new product always raises the price of the shares as the investors are in the opinion that investing in the shares of this product will raise their returns by a certain margin. It is during this time that the stock prices are higher than the level of the efficient market. It is seen that after the prices rise just after the announcement, gradually the price starts falling as days pass after the announcement. Line 4 of the diagram reveals that the prices of the shares have fallen with respect to the efficient market and with time it slowly rises but after a certain level remains constant (Titterington et al., 2015). The rise in the share price is even lower to Line 1 and therefore it suggests that the investors have adequate knowledge about the future stock prices and the stock market and therefore are reluctant to invest in the share market. The Gordon Growth Model is even known as the Dividend Discount Model that is known to be a process for computing the internal stock value by excluding the present market conditions. The model computes the value that is created with the current value of the future dividend of the stock that grows at a constant rate (Madoroba and Kruger 2015). It is seen that that the dividend per share that will be payable by the company in one year, this model resolves for the problems of the present value of the in numerous series of the future dividends. The model values the stock of a company by making use of the estimation of steady growth in the company payments that are given out to the general equity shareholders. There are three significant factors that are available with the model and they are namely the rate of growth, the dividend per share and the rate of return (Ferrs et al. 2016). The annual payment given out by a company to their shareholders is known as the dividend per share. The growth rate over the dividend per share reveals the level of rise in the dividend in the next year with respect to the current year. The required rate of return on the other hand is the minimum expectation or the return that an investor expects and accepts when they purchase the stock of a company (Turnbull et al. 2014). By looking at the question that is given with the help of the diagram, it is seen that if the growth rate of the company is approaching to closer to the required rate of return on an investment in equity then one should not invest in such stocks until the growth rate is equal to the required rate of return. An investor should always invest in stocks which have a growth rate equal to higher than the required rate of return as the required rate of return is the minimum amount that an investor expects to receive when they invest in an equity stock (Sloboda et al. 2016). It is seen that if the growth rate is closing in to the required rate of return, it suggests that the value is lower than the expected minimum amount and it is not certain that the growth rate in the next year can reach the expected return as though the Gordon Growth Model describes that the dividend grows at a constant rate, it may not be the case all the time, as the growth may cease due to the availability of business cycles. Therefore, an investor should always invest in a stock in the equity when the growth rate is more than the required rate of return as in case of any loss due to the internal and the external factors in the market, the investors are sure to receive their required rate of return and investing in shares where the growth is approaching the required rate of return may not give out the minimum expectation of the investors (Scott 2015). Therefore, according to the question, one must not invest in the shares of the company that has growth rate that approaches the required rate of return. Reference List Bodie, Z., 2013.Investments. McGraw-Hill. Burton, F.E.T. and Shah, S.N., 2017. Efficient Market Hypothesis.CMT Level I 2017: An Introduction to Technical Analysis. Duncan, J., Anderson, S.C., Price, S. and Thomas, C., 2017. The Gordon Growth Model: A Teaching Case.Journal of Business Case Studies (Online),13(1), p.23. 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