18 of Market and Return of Market. Risk of Market shows the Risk of each
market that will take by the investor. Risk of market can either be measured by using the standard deviation or variance between returns
from that same security or market index http:www.investopedia.com. d Market Capitalization, According to investorwords, it is represents
the aggregate value of a company or stock. It is obtained by multiplying the number of shares outstanding by their current price per share. Market
capitalization is use to see the size of the market. The higher the amount of capitalization market it is means the higher the size of the market
http:www.investorwords.com
2.1.4 Random walk Theory and Efficient Market Hypothesis
According to Bodie et al. 2008 random walk theory is the notion that stock price changes are random and unpredictable. If stock price movement were
predictable, that would be damning evidence of stock market inefficiency. According to Rose, Peter S. and Marquis, Milton H. 2008 the efficient
markets hypothesis suggest all information that has bearing on the market value the prices of that assets. Bodie et al. 2008 define that efficient market hypothesis
is the hypothesis that prices of securities fully reflect available information about securities. It’s clearly define by McMillan et al. 2011 that efficient market is a
market in which asset prices fully reflect all past and present information; market in which asset prices reflect the new information quickly and rationally. The
important point of efficient market is price should be expected react only to the measured by using th
th e
e standard d d
ev evia
ia tion or variance between returns
from that sa a
m me security or market index http:
ww www.investopedia.com.
d Mark k
e et Capitalization, A
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o investorwords,
s it is represents
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2.1.4 Random walk Th
eo ry a
nd Efficie
nt Mar
ket Hypothesis
Acco rd
in g
to o
B B
od od
ie ie
et et
al. 2008 rand
nd om
om w
w al
al k
k th
eory i
s th
e e n
notion t t
ha ha
t t
stock price changes are random and nd
u u
np np
r redictable. If stock price movement
t we
we r
re pr
pred edic
ic ta
ta ble, that would be damning evidence of stock market inefficien
en c
cy. Ac
A co
d rd
i ing
to to
R R
o ose, Peter
r S
S. an
an d
d Ma Ma
rquis, M
M il
il to
to n
n H
H. 20
20 08
08 the
e ef effi
ficient mark
ket et
s s
hy y
po p
th th
es es
is is suggest all inf
nformation on that has bear
in in
g g
on the e
m m
a arket value
the prices of that assets. Bodie et t al.
2008 define that efficient market hypothesis
is the hypothesis that prices of se ecurities fu
fully reflect available information about securities. It’s clearly define by Mc
cMilla lan et al. 2011 that efficient market is a
market in which asset prices fully refle le
ct all past and present information; market
19 elements information release such as unexpected or surprise information and
investors process the unexpected information and revise expectation. Rose, Peter S. and Marquis, Milton H. 2008 explains that if efficient
market hypothesis is correct, investors will react to temporary underpricing or temporary overpricing of assets and make changes in their portfolios because any
temporary deviation of actual returns from expected returns should be eliminated. McMillan et al. 2011 also stated that there are some factors that
contributing to market efficiency such as market participants where the number of investors individual and institutional related to the market efficiency. Other
factor is information availability such as trading activity and traded companies and financial disclosure
. There are two costs that incurred by traders in identifying
and exploiting possible market inefficiencies affect the interpretation of market efficiency. First is transaction cost, according to Investopedia
http:www.investopedia.com it is an expenses that incurred when buying or selling securities. Transaction costs include brokers commissions and spreads the
difference between the price the dealer paid for a security and the price the buyer pays. Second is information acquisition cost, the cost of a business to acquire a
new customer. The company recognizes costs, including marketing and incentives, to introduce new customers to the companys products and services.
The customer acquisition cost is calculated by dividing total acquisition costs by total new customers over a set period of time.
According to Bodie et al. 2008 in market equilibrium, efficient informational gathering should be beneficial, because when information cost
Rose, Peter S. and M M
ar arquis, Milton
n H
H . 2008 explains that if efficient
market hypothesis is is correct, investors will react to
te te
mp m
orary underpricing or temporary ov
overpricing of assets s
an n
d d
ma ma
ke ke
c c
ha ha
ng ng
es in their port rtfo
fo lios because any
tempor r
a ary deviation
o of
a a
ct t
u ual returns from expecte
e d
d r
re tu
turns should be e
eliminated. Mc
Mc Mi
Mi ll
l an
a et a
a l
l. 2
011 also stated t ha
t t
th th
ere ar ar
e so
so me
m facto
tors that contri
ri bu
buti ting
ng to
m ma
rket efficiency such a
s market participa nt
t s
s where
e th
th e
e nu
n mb
b e
er of in
n ve
ve st
t ors i
i nd
ividual and institutiona l
related t
o th
e market e
e fficie
ie nc
nc y
y. Oth e
er fa
fact ct
o or is
s in
fo rmation availa
bi li
ty suc h
as tradi ng
activity and tr ad
d ed
e c
com ompa
pa nies
an d
fin nanc
ial disc lo
sure .
. There
are tw
o co st
s th at incur
re d by
traders i
n n identifyin
ing g
and ex x
ploiting possible ma rket
i ne
fficienc ie
s affe ct the interpretatio
n n of m
m a
arke et
effici cien
en cy.
Fi rs
t is
is t
t ra
ra ns
n action cos
s t
t, a
a cc
cc or
or di
d ng
t o
In Inv
vestoped ed
ia ia
h ttp:www.investopedia.com it i
i s
s an n
e xpenses that incurred when buyin
ing g
o or
se sell
l in
ing g
securities. Transaction costs include brokers commissions and d
s s
p prea
ea ds
ds t
the di
di ff
ffer e
ence b
b t
etween t t
he he
p p
i rice the
d d
ea ea
le le
r r pa
paid id
f for a sec
ecur ur
it ity
y an
d d
th the price
th th
e b
buyer pays
. Se
S cond
d i
i s
s in
information acqu quisition
c cost, the cost o
f f
a a
bu b
siness ss
t t
o o acquire a
new customer. The company y recognize
es costs, including marketing and incentives, to introduce new cus
to t
mers to o
the companys products and services. The customer acquisition cost is cal
alcula a
t ted by dividing total acquisition costs by
total new customers over a set period of o
time
20 investors’ money to uncover and analyze, investors will expect the investment
analysis result can increased the expected return and investor will have an incentive to spend time and resources to analyze and uncover new information
only if that activity can generate higher investment return. According to Fama 1970 in McMillan et al. 2011 there are three forms of
efficiency that shows in Table below:
Table 1 Three Forms of Market Efficiency
Market Prices Reflect : Forms of Market Efficiency
Past Market Data
Public Information
Private Information
Weak form of market efficiency √
Semi strong form of market efficiency
√ √
Strong form of market efficiency √
√ √
Source: McMillan et al. 2011 According to Fama 1970 in McMillan et al. 2011 the securities prices
in the weak form fully reflect the past market data, which refers to historical prices and trading volume information. The investors cannot predict the future
prices changes by extrapolating prices or pattern of prices from the past because it’s already reflected in current prices.
Prices in Semistrong form efficient market reflect all the past and publicly available information. In Rose, Peter S. and Marquis, Milton H. 2008 all buyers
and sellers are rational and use the all publicly available information to help them value financial assets.
Strong form shows that securities prices is fully reflect all the public and private information such as information that possessed by insiders who work with
incentive to spend time and re re
s sources to ana
naly ly
ze and uncover new information only if that activity
y ca
can generate higher investment retur r
n. n
Accord d
in ing to Fama 1970
in n
Mc M
Mi Mi
ll ll
an an
et et
al. 2011 there
e a a
re three forms of efficien
ency that shows s
in in
T T
ab a
le below:
Table 1 Three Forms of Market Effici
en n
cy cy
Mark et
Prices Reflec t
: Fo
orm rms of M
M arket Efficiency
Pa st Marke
t Data
Public Information
Pr P
ivat t
e e
In n
fo form
r at
i io
We Weak f
f o
or m
of m
arket efficien cy
√ Semi
str ong
form of ma
rk et
efficie en
cy √
√ St
S rong
g form of market efficien
cy √
√ √
So o
ur ur
ce e
: McMi
ll an et a
l. 2
011 According to Fama 197
7 0 i
i n
n Mc
Mc Mi
Mi ll
llan et al. 2011 the securities pr pr
ic ic
e es
in in
t t
he h
weak form fully reflect the past market data, which refers to h h
is isto
tori ri
c cal
pr pr
ic ic
es es a
and nd
t t
ra ra
di di
ng ng v
vol olum
um e
e in
info fo
rm rmat
at ion.
n. T
The he
i inv
nv es
es to
to rs
rs c
c an
an no
no t
t pr
pr ed
ed ic
ict t
th th
e e fu
fu ture
pric ices
e c
c ha
ha ng
ng es
es b
by y
ex ex
tr trapolating
g pr
p ices or pa
pa tt
ern of p ri
ri ce
ce s
fr fr
om om
t t
he he
pas s
t t because
it’s already reflected in current pr r
i ices.
Prices in Semistrong form m efficient m
market reflect all the past and publicly available information. In Rose, Pete
ter S. a a
n nd Marquis, Milton H. 2008 all buyers
and sellers are rational and use the all l
p publicly available information to help them
21 the company and have access to its privileged information as stated in Rose, Peter
S. and Marquis, Milton H. 2008.
2.1.5 Asymmetric Information
