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Corporate Finance Essay

673 words - 3 pages

Corporate Finance

Student Name
Professor Name

24th May, 2014
Answer 1)
Important to note that the value of the Certificate of Deposit increase in value in relation with the inflation rates, i.e. CD always track inflation rates. Thus, if during 2007 the inflation rate in the US was 4.1% and the average return in a Certificate of Deposit (CD) was 3.65%, in such case it would have been rational for the investor to invest in CD as the value of CD would have increased in par to 4.1% inflation rate
Answer 2)
I totally disagree with the statement as it only depends upon the individual as how they are playing in the stock market. An individual can be described as an investor or gambler depending upon the methodology he is following while playing in the stock market. For Instance, if the individual is buying a stock just because it has shown an increasing trend in recent days or just because some of his friends has recommended, of course, it will be a pure gambling. However, if ...view middle of the document...

Thus, it is impossible for an investor or group of investor to earn supernormal or excess profits using past prices of the stock. Thus, using technical analysis will be of no help for the purpose of outperforming the market.

Semi-Strong market efficiency:
The semi-strong form of market efficiency asserts that the current stock prices in addition to past prices of the security, fully incorporates all the new public information relating to dividends, earnings announcements, significant change in management, etc. Thus, no investor can use the fundamental analysis to earn excess returns in the market which is efficient in the semi-strong form.
Strong form market efficiency:
The strong form of EMH holds that the security prices fully reflects all the information from both the public and private sources, thus no investor has any kind of exclusive access to the insider information which he can use to earn supernormal profits.

Answer 4)
In a recent conviction by the Federal Court of New York, former SAC Capital Portfolio Manager, Mathew Martoma, was convicted of corrupting two doctors and obtaining the insider information from them during the 2008 pharmaceutical trial for an Alzheimer’s drug. Martoma later used this information to trade the securities, which allowed SAC to make gains and avoid losses of $276 million.
The practice of Insider Trading is illegal from the point of view of regulators, investors and society:
Investors: An investor always assumes that the financial markets will be a fair play, however, the practices of Illegal trading forces the investors to lose confidence in the functioning of the financial markets and thus leads to loss of integrity of the whole capital market.
Society: The essence of Illegal Trading is to provide benefits only to one individual or group of individuals. Thus, illegal trading promotes unequal distribution of wealth and with only one section of society earning substantial gains; it is possible that all around opportunities are not created in the society.
Regulators: Since it is the responsibility of the regulators to curtail any form of illegal practice in the society, any sort of illegal trading is a direct violation of federal or SEC laws

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