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Original Articles

The relationship between portfolio theory and the efficient market hypothesis

, FCA, CA(SA), B.Econ, B.Com(Hons), M.Com.
Pages 17-21 | Published online: 18 Feb 2015

References

  • This paper is an adaptation from part of an unpublished MCom dissertation submitted and accepted by the author to the University of South Africa.
  • See for example:
  • B. P. Gilbertson and F. J. P. Roux. The Johannesburg Stock Exchange as an efficient market. The Investment Analysts Journal, March 1977, No. 9.
  • P. J. Strebel. The limited efficiency of The Johannesburg Stock Exchange. The Investment Analysts Journal, August 1977, No. 10.
  • P. A. Kerbel. Portfolio selection: a non-technical overview. The Investment Analysts Journal, August 1977, No. 10.
  • B. P. Gilbertson and F. J. P. Roux. Some further comments on The Johannesburg Stock Exchange as an efficient market. The Investment Analysts Journal, April 1978, No. 11.
  • Von Neumann, J. and Morgenstern, O. Theory of games and economic behaviour, Princeton, New Jersey: Princeton, University Press, 1953.
  • Bernoulli, D. Exposition of a new theory on the measurement of risk. Econometrica, Vol. 22, No. 1, January 1954, p. 23–36 (a translation into English from the Latin of a treatise first published in 1738), as reprinted in The theory of business Finance, edited by Stephen H. Archer and Charles A. D'Ambrosio, New York: MacMillan, 1967.
  • Bachelier, L. Theory of Speculation. Ann. Sci. Ecole Norm. Sup. (3) No. 1018, Paris 1900 (translation by A. James Boness printed in The Random Character of Stock Market Prices edited by Paul Cootner. Cambridge, Mass: M.I.T. Press 1964).
  • Lorie, J. H. and Hamilton, M. T. The stock market: theories and evidence, Homewood, Illinois: Irwin 1973, p. 72.
  • Osborne, M. F. M. Brownian motion in the stock market. A paper read before the U.S. Naval Research Laboratory Solid State Seminar, February 28, 1958 and printed in The random character of stock market prices, edited by Paul Cootner. Cambridge, Mass: M.I.T. Press 1964.
  • (a) Kendall, M. G. The analysis of economic time series Part I: Prices, Journal of the Royal Statistical Society (Ser. A), Vol. 96, 1953 p.11–25, as reprinted in The random character of stock market prices, op.cit. p. 85–99. (b) Working, H. A random-difference series for use in the analysis of time series. Journal of the American Statistical Association, Vol. 29, No. 12, 1934.
  • Osborne, op.cit. p. 100.
  • Osborne, op.cit. p. 127.
  • Roberts, H. V. Stock market ‘patterns’ and financial analysis: methodological suggestions. The Journal of Finance, Vol. 1, March 1959, p. 1–10, as reprinted in Modern Developments in Investment Management, edited by J. Lorie and R. Brealey, New York: Praeger, 1972.
  • Roberts, op.cit. p. 163.
  • Moore, A. B. Some characteristics of changes in common stock prices, in The random character of stock market prices edited by Paul Cootner. op.cit. p. 139–161.
  • Granger, C. W. J. and Morgenstern, O. Spectral analysis of New York stock market prices, in The random character of Stock market prices, edited by Paul Cootner, op.cit. p. 162–188.
  • Fama, E. Random walks in stock market prices. Financial Analysts Journal, Vol. 21, No. 5, September-October 1965, p. 55–59, as reprinted in Elements of Investments edited by Hsio-Kwang Wu and Alan J. Zakon, 2nd edition. New York: Holt Rinehart, 1972, p. 615–624.
  • The following are further examples of such research findings:
  • Cootner, P. H. Stock prices: Random versus systematic changes. Industrial Management Review, Vol. 3, No. 2, Spring 1962.
  • Fama, E. F. and Blume, M. E. Filter rules and stock market trading. Journal of Business, Security Prices, a supplement, Vol. 39, No. 1 part 2, January 1966.
  • Levy, R. Random Walks: reality or myth?, and Jensen, M. C. Random Walks: reality or myth? a comment. Financial Analysts Journal, Vol. 23, No. 6, November- December 1967.
  • Fama, op.cit. p. 623.
  • B. P. Gilbertson and F. J. P. Roux, op.cit.
  • P. J. Strebel, op.cit.
  • The following are some of the research findings in this area:
  • Sharpe, W. F. Mutual Fund Performance. Journal of Business, Security Prices: A supplement. Vol. 39, No. 1, part 2, January 1966, p. 119–138.
  • Ball, R. and Brown, P. An empirical evaluation of accounting income numbers. Journal of Accounting Research, Vol. 6, Autumn 1968, p. 159–178.
  • Fama, E. F., Fisher, L., Jensen, M. C. and Roll, R. The adjustment of stock prices to new information. International Economic Review, Vol. 10, No. 2, February 1969, p. 1–21.
  • Fama, E. Efficient capital markets: A review of theory and empirical work. The Journal of Finance, Vol. 25, No. 2, May 1970, p. 383–417.
  • Beaver, W. H. What should be the F.A.S.B's objectives? Journal of Accountancy, August 1973, p. 51.
  • Sharpe, W. F. Capital asset prices: a theory of market equilibrium under conditions of risk. The Journal of Finance, Vol. 19, No. 3, September 1964, p. 425–447.
  • Litner, J. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, Vol. 47, No. 1, February 1976, p. 13–37.
  • Fama, E. Efficient capital markets, op.cit.
  • Vasicek, O. A. and McQuown, J. A. The efficient market model. The Financial Analysts Journal, Vol. 28, No. 5, September-October 1972, p. 72.
  • Vasicek and McQuown, op.cit. p. 71.
  • The development of these models are discussed in the author's unpublished paper “An Introduction to Capital Markets Theory”.
  • Black, F., Jensen, M. C. and Scholes, M. The capital asset pricing model: some empirical tests, in Studies in the Theory of Capital Markets edited by Michael C. Jensen, New York: Praeger, 1972.
  • Black, F. Capital market equilibrium with restricted borrowing. Journal of Business, Vol. 45, No. 3, July 1972, p. 444–455.
  • Examples of such studies include:
  • Jones, C. P. and Litzenberger, R. H. Quarterly earnings reports and intermediate stock price trends. The Journal of Finance, Vol. 25, No. 1, March 1970, p. 143–148.
  • Cheng, P. L. and Deets, M. K. Portfolio returns and the random walk theory. Journal of Finance, Vol. 26, No. 1, March 1971, p. 1–10.
  • Fama, Efficient capital markets, op.cit. p. 143.
  • Vasicek and McQuown, op.cit. p. 83.
  • Lorie and Hamilton, op.cit. p. 104.
  • Clarkson, G. P. and Meitzer, B. H. Portfolio selection: a heuristic approach. Journal of Finance, Vol. 15, No. 4, December 1960 as reprinted in Elements of Investment edited by Hsiu-Kwang Wu and Alan J. Zakon, New York: Holt Rinehart, 1965, p. 312–326.
  • Black, F. Implications of the Random Walk Hypothesis for portfolio management. Financial Analysts Journal, Vol. 27, No. 2, March-April 1971, p. 16–22, reprinted in Modern Developments in Investment Management edited by James Lorie and Richard Brealey, New York: Praeger 1972, p. 449–458.
  • Ibid., p. 457.
  • Blume, M. E. On the assessment of risk. The Journal of Finance, Vol. 26, No. 1, March 1971, p. 1–10, reprinted in Modern Developments in Investment Management edited by James Lorie and Richard Brealey, New York: Praeger, p. 459–468.
  • Vasicek and McQuown, op.cit. p. 75.

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