Efficient markets

Abstract

So far, in this book, we have concerned ourselves primarily with how securities can be valued. For example, forward rates in Chapter 4 gave us a method for forecasting future gilt prices and estimating their expected holding period returns. Particular gilts could then be chosen according to investor expectations about future interest rates. Also, in Chapter 5, it was shown how Gordon’s growth model could be used to estimate the expected HPR on a share, given assumptions concerning the company’s future dividend policy. The shares with the best prospects for high returns or those which were considered undervalued could then be acquired. This type of investment strategy, where securities are evaluated and selected on their individual merits, we shall call ‘picking winners’.