garvia.es

Foundations of Finance (FoF) – Session 12

NYU | February 25, 2026
Instructor: Luis Garvía Vega
Duration: 1h 12min

1. Big Picture: Why This Class Matters

Today’s session connects theory with reality.

We moved from:

to something deeper:

Finance is about managing an unpredictable future.

And how do we manage an unpredictable future?

Through information.

2. What Is Finance?

We have asked this question before.

Many answers appear:

But conceptually:

Finance = managing uncertainty in order to obtain return.

We cannot predict the future.

But we can:

And that is exactly what financial markets do.

3. Risk = Uncertainty

We use the word “risk” in different contexts:

In stocks:

In bonds:

In derivatives:

Key idea:

Finance exists because the future is uncertain.

4. Information and Markets

If finance is about uncertainty, then markets must process information.

Everything depends on how information is incorporated into prices.

This leads us to:

5. Market Efficiency

The core definition (Fama, 1970):

A market is efficient if prices fully reflect all available information.

Important:

6. The Three Forms of Market Efficiency

We classify efficiency according to the information set considered.

6.1 Weak Form Efficiency

Prices reflect:

All past (historical) price information.

Implication:

Technical Analysis

If markets are weak-form efficient:

You cannot predict future prices using only past prices.

6.2 Semi-Strong Form Efficiency

Prices reflect:

All publicly available information

Including:

Implication:

Example:

If markets are semi-strong efficient:

Public information cannot give consistent abnormal returns.

6.3 Strong Form Efficiency

Prices reflect:

All information — public and private (inside information).

Implication:

If price moves BEFORE public news:

7. Arbitrage and Market Corrections

Critical question:

What happens when there is an inefficiency?

Answer:

Arbitrage.

Arbitrage means:

But arbitrage does something else:

It corrects the inefficiency.

Therefore:

This is a dynamic process.

8. Can We Predict the Future?

Two big approaches:

1️⃣ Technical Analysis

Uses only past prices.

If weak-form efficiency holds:

2️⃣ Fundamental (Value) Analysis

Uses public financial information.

If semi-strong efficiency holds:

Yet some investors (e.g., Buffett) have historically outperformed.

This opens debate:

9. Strong Form and Insider Information

Imagine:

This suggests:

Strong-form efficiency would imply:

Reality:

10. Anomalies

Over time, researchers have identified:

But something interesting happens:

Once an anomaly becomes widely known, it tends to disappear.

Why?

Because:

This is why Fama’s work is so influential.

11. CAPM Limitations and Multi-Factor Models

CAPM uses:

[ E(R_i) = R_f + \beta_i (E(R_M) - R_f) ]

One beta only (market beta).

But later research showed:

Fama and French expanded CAPM into:

Core idea:

One beta may be too simple.

But CAPM remains the foundation.

12. Key Conceptual Question

Instead of asking:

Ask:

What happens when there is inefficiency?

Answer:

Efficiency is not perfection. It is a tendency toward information incorporation.

13. What You Must Know for the Midterm

Focus on:

You do NOT need:

14. Final Takeaway

Finance = managing uncertainty.

Markets manage uncertainty by incorporating information into prices.

Market efficiency asks:

How fast and how completely does information enter prices?

And the entire structure of modern finance builds on this question.

Transcription

25 de febrero de 2026, 5:11p.m. 1 h 12 min 17 s Here.
It.
No.
I want to change the language; this is Spanish, this is English.
English. Yes, I I start recording the class.
And also, oh, this is sorry, sorry for this.
This is from Christmas this.
I mean, this is from Christmas night. Yes, I am the one on the on the left. It’s a red panda, red panda. Then on the right, my my daughter.
Pablo is the leader, my son.
I mean in Spain.
It’s something. Sorry for me talking about this. Yes, right now. Sorry for me talking about. You know what I’m going to talk about.
And it says there that I think you guys did it in the States.
And it has came to I don’t know if I have. If you have asked me last week about the time you or not, a lot of the students have asked me last week. Always do you know somebody you are aware of this two weeks ago.
Please tell how crawling yourself like an animal you have all this.
you know
Last thing before the last, there are people growing the family, growing like animals and.
OK, let me sorry for showing you this.
I need, I need Easter, I need the holidays and it’s because I was coming.
Oh no, today is not the day for cleaning tobacco.
Sure.
Hey, hey.
Yeah, nothing here.
Are here. You have not hear about this trend. None of you.
Any that’s located from the States?
Yes.
Have you handled that?
This is great and it talks really good about your mental health. You have not heard about this.
But trust me, there are tons of people talking about this stupid thing and I don’t want to be one of this.
OK, we see session.
What?
It’s improved.
Bones.
OK. Did they say would you? Yes, no.
I have already don’t know. I Sir, I I’m sure I did. Let me close this one.
Let me move here. Oh, no, I haven’t press this button. OK, hey.
This comes here.
Market efficiency.
What did you call these animals?
There it is.
It already existed. It’s here it’s.
Sam, do you know what are periods you know?
It used to be that and now they are in the newspapers. Now they are in the newspapers.
OK.
I say.
You have power.
OK.
You know, Jerome Powell is the chair of the Fed. Jerome Powell is the chair of the Fed. We talk about Jerome Powell at the begin of the course because you can take one.
We talk about your because they want to.
If we talk about the power at the beginning of the course. Why? Why? Because he was going to talk about interest rates. He will talk in the 17th of March.
I will talk again about this.
Now all of you know about your home.
The beginning of the class, I was thinking about the takers. I was the only one. Then Sophia came into my and.
Any worse?
Have you heard his name?
Matter go ahead any worse?
Please move any words.
But it because she’s a mask. It’s not a mask. For me, it’s a mask. You know it. And for me, it’s a mask telling you there is a mask.
All of you know about present value formula.
Don’t like it. Don’t like it. Oh, you know the prison very formula.
All of you know about how to create a portfolio that combines the risk free asset with an asset. Then there’s there will be someone. Now some little bit less all of you.
Oh, you did. So what I’m talking about? Have you Google getting worse? Who is? Who is going? Who is going to be getting worse?
Who’s going to make any worse?
And they will finish with in May. May probably he will be. He will hold last conference. I know really soon, but after May rewards is gonna be the new chair he was.
He knows a little bit about Bitcoin and that’s.
Dianes, you know Powell, Trump. I’m sorry, Trump. I don’t know because Trump knows Trump. Anyone knows Adani Trump.
Disappointed. Oh, you know what I’m talking about? Did I say proper that money? I said sentence.
If I say, if I say bad money, all of you think about Super Bowl.
He was there for free. He was there for free.
Why? Why?
Nobody was there for free.
Because everyone knows he was there.
Yeah.
Who was there for free?
Why he was there for free?
Why? Why? Why that value was in the Super Bowl for food?
Oh, I mean, because he performed, he should be paid for that. So he performed. He don’t know why he went there for free.
Why you were there for free?

  1. Because of everyone.
    Now, because I’m now talking about him.
    I’ve gone to Trump. Everyone knows Trump. Why I’ve gone to Trump? Because everyone knows him.
    And then I went to Bath Valley. I went to Bath Valley.
    Because everyone knows that body and everyone knows that that body was in the Super Bowl.
    Yeah, OK. All of you know, second.
    You know it a minute.
    Joy, you know, congratulations. Great.
    So much.
    I’ll know.
    I think I I know when we’ll make. I know every lobby. I know every lobby. You know every lobby.
    And then I was thinking about the one with the other Canadian, the the singer. Yes, I’m sorry, sorry, I was. I don’t know any Canadian singer. And then Abir Lavin and then Abir Lavin and then.
    Hey, we can.
    With the weekend.
    That is asymmetry between you and me. Sorry, sorry, I’m a woman.
    I would like to know him or her or eat the weekend. I would like to know him.
    Hi.
    I don’t know.
    Why I went to the Super Bowl because of publicity.
    Policy.
    What are we going to talk about today? Any hands?
    Bye.
    I’m going to talk. I see what? What was assuming? We’re talking about the weekend. I have heard about the weekend, but for example, you tell me any baby.
    At least, Joe. Yeah, at least.
    I was talking with one student and my kid was there. I was trying to think about one job area.
    So he’s had no names going into my head. And that moment I felt really all.
    No means. There is one that say from spending things, the one that has one I know that sees. I don’t know if she is.
    I don’t know. If you tell me her name, I can say OCS, but I am out.
    well What are we going to talk about today? What are we going to talk about today?
    I would like to ask all.
    You said.
    Um.
    Oblique.
    We are going to talk about new phones.
    Ragna Baka Ali phones.
    Probably today’s class is the most important class.
    5 minutes.
    And at the end, the most important things in life.
    Most important easy, right? Don’t need two masks. Yes.
    A lot. I don’t know that. Why is it most important in life?
    Who is the person you should love the most? Yourself. Yourself.
    Um.
    I’ve I’ve already asked. Have you go with your family?
    Have you talk with your family? Have you talk with your family? Perfect.
    Then you have two bags.
    Work to do. Sorry, sorry. Work to do. There’s a lot of work to do. Things to see. There are not too much things to see.
    That would you?
    And yes, today we are going to talk about information. So I want to talk with something that moved you.
    That there is a symmetry. I was thinking that there were more people that knew about Terrius. I thought that you were gonna feel because you know and I’m.
    You.
    And the day after it was soon.
    The morning, my my kid told me the other day, Pablo, the one in the middle, he’s here. He’s going, please start that. He’s going that. You know he know.
    I didn’t know I I called him. You are alive. I don’t know him and I work. I want you. He cannot know Charlie in Spanish. I saw.
    You understand what I’m saying once I arrive to my first Spanish class this morning.
    I oh, he wasn’t understand. There was in this wrong way.
    I like to say what had happened? What had happened? What happened? But I’m talking to put it with it. I just say what happened without thinking. And once I realized that we don’t say in a word. I promise it happens this way. We don’t say in a word.
    Wait one minute outside.
    Because it was the day of him. I mean arrested, no matter. I live. It was one person that was up, was up in public and was up in the university. This is something that never should happen. I have.
    Class. Then after we named, there was one person from the stair that came here, one person that in order to take my class, how I and I was in no time here. He was killed.
    He was from NYU and she didn’t, I promise. She didn’t know Charlie here, or she was sure. When I realized that this is not a matter of reading the state, it’s a matter of you have to talk for me.
    You have Victor. You know Charlie. You knew Charlie here before he was. You don’t have Victor.
    You know, in our little chances, you understand what I’m saying?
    I’m looking several information information that.
    Can this information come through the Internet?
    But no matter how fast information problem, it takes time. It takes time. Probably, probably, this money, we’ll never know what is that area.
    Probably see me there now.
    And and nothing happens. The war will continue. Information takes time, no matter how well interconnected we are. Information takes time.
    OK, Jerome Powell, absolutely important because he talked about race. Kelly Wars is the next Jerome Powell. So as important as Jerome Powell because because of that apparently this is because.
    What else? This I’m going to talk. I wouldn’t. I will be talking the whole hour about what I’m going to say. I’m not going to spend the whole hour. I’m going to take just one minute, two minutes, three minutes. What happened in the States last Friday?
    That was nothing to say last Friday.
    Oh.
    No, no, no, no one. Look Supreme Court, Supreme, Supreme Court and that.
    Yes, the the 20th of January, 20th of January.
    From sorry, the 5th of November, Trump was elected. 5th of November, Trump was elected. Yes, we’re behind wrong with 9th, 20th of Nove of January, he start.
    He start his presence. One of the first thing he said of the first thing he said is that he was gonna put that if he start saying today Chinese electrical vehicle and then.
    The Chinese get happy and he change instead of talking about tariffs regarding the Chinese, he start talking about tariffs regarding Canada and Mexico.
    Yeah, it was sold and then the second of happy.
    We appear in front of the whole wall. We have probably you have seen the picture of track with all the types. You know what picture I’m talking about.
    OK, let me show you the picture because she has.
    It has to do with finance, at least, I mean.
    OK, have you seen this picture?
    Is the first time you see this picture?
    It’s the first time.
    OK.
    Is it the first time you see this? Yeah, all of you. OK, then I’m going to show you another picture then.
    What about this picture or this? Do you know?
    Do you know who is this guy?
    All of you know Thaneski.
    Do you remember this meeting?
    Sorry, let me go quick. Yes, I’m not going to spend more than I would go quick.
    Absolutely important. Absolutely important.
    I’m not talking. At least I’m trying. I’m trying not to talk about the ideology, yes.
    I guess.
    You course have to do with finance. You are study, you are studying for the leader.
    And probably you are not really, really aware, but at the end of the course, at the end of the course you win.
    We understand how important interest rates are for my course.
    The better rates are so, so, so important.
    Who is the one that talks about people in race in the States?
    I want.
    The theoretical things that we are talking about here, I want you to connect with the real world. Do you understand what I’m saying now? Also, probably, I don’t know if you want to work in finance or not, if you want to work in finance.
    Baby.
    Or at least there is. There are some knowledge that if I were you, I would work hard in order to know things that are going on in the world with all respect, yes.
    I will hear about.
    For my course, not for we are right. If you ask me for who is your poll, not to ask people who who will make people without the who know who who we are, who is.
    Another important piece of information that is important. Trump was elected one year ago. All of you know who’s Trump.
    And that is is one of the worst. He has been saying the most.
    and it has to do with governance, with international governance. Make sense?
    Paris goes on one side. Also, there is another important thing regarding Trump’s presidents. There are two war counts.
    Israel, Middle East, Israel and all their neighbors. All Israel neighbors. Yes, Israel.
    I’m grateful.
    Geopolitical things. These are three important geopolitical things, and for my course it matters because of uncertain that I’m going to collect, yes.
    What happened last Friday? The United States, they call as declare as declare that tariffs are not legal.
    What Trump said immediately after has been heard this, that the Jews that has gone this are traders.
    And he was going to impose 110% more times.
    Yes.
    You understand what I’m saying? So great, so great work. If they’re legal, Trump said. It’s what he said. I’m not saying this is good or red or not. I’m just telling you what had happened, yes.
    You get it. The Supreme Court has declared legal.
    Which at this point nobody has at least I don’t know. Nobody has say, oh, pay me back. Yeah, I don’t sense that the tariffs that no, nobody has said that. OK, OK, everyone who say pay me back my tariffs.
    These means are between 150 billions and 200 billions. This has to do with public debt. It has to do with several things I am just talking about.
    OK, what do I know? Perhaps last Friday, the goal has a care, you know.
    I mean, it’s not too much, too much more things to say and I’m not saying I’m not talking about the idea of it.
    Anyone have any question regarding whatever you want to know from me or you want to know from the situation or if you want to know my opinion or whatever, please ask.
    I’m not gonna give you my opinion.
    Because you have not asked for my opinion and you are not here in order to know my opinion. You are here in order to be prepared for finance or you understand the point, no?
    Does it make sense?
    Perfect. Do you have any question regarding why not? So what? What about China?
    I have already told you that China is so, so important and India also only with me. I’ve already said that. OK, coming back, what is this course about?
    Dan, what is this course about?
    Finance and what is finance?
    Hello.
    As well.
    The information ID.
    I have to send information. We have played this game at the beginning of the course. We already played this game at the beginning of the course. I asked Ivan because you are not here.
    And stocks are financial instruments and first word normally people say is money.
    But please, probably you will find out. I don’t want to do that. You will find this in the meantime. You are not going to hide this question.
    I play this game. What is finance? People say things. Normally there are people that say the bank the door.
    And there are people that say, no, there are not much people that say, but I would love if anyone say liquidity, if I ask what is finance and everyone say liquidity, I will put in immediately an A.
    What is finance equity?
    We we don’t. We we don’t know.
    We don’t run. We don’t run.
    Captain connects. Victor Ruiz. What is Ruiz?
    OK.
    Careful. What is risk with the information that you put risk is?
    Two things. One, that is true. I use the same word to talk about two different things that at the end is the same. Please would be. Yes, you have audience.
    But also risk would be for one years.
    Covariance between my stock and the market. If I calculate the covariance between the stock and the market and I divide it over the buyers of the market, what is risk?
    Data that Javier is barriers or covariance movement. Make sense.
    But you are calling bias is risk for stocks. We are talking about the stocks. What is risk? Buy-ance better volatility. Makes sense.
    And what is risk? We will talk about bonds. We will talk about deliveries. We can talk also about insurance.
    When I was talking about, when I was talking about what had happened last Friday, the Super record, I have told you two important things. Please, all of you, I want your attention.
    Two important things I have to the Super Bowl. Yes. First thing, first thing is first thing was that it’s are illegal because of the Super Bowl. Yes. And please.
    The second important thing that I have told you is really, really, really important.
    So we are so.
    This is the most violent thing had happened in a class with you.
    I will, I will do. Once I quote all of you, I will.
    First important thing, that is our legal set by the Super Court. The second important thing, the bad. The second important thing is that I don’t have any idea. I don’t have any idea regarding what is going to happen.
    I don’t have any idea. You can continue with your, continue with your.
    With your partners, with your with your skills, you can continue with your skills. The second important thing is I mean and when I say I.
    No one knows. No one knows.
    I don’t know what is going to happen. I don’t know what is going to happen. And what does this mean? Let me use one intermediate word. I don’t know what is happening. What does this mean? And certainly.
    But for something, I get a fire. I don’t know what’s going to happen. What does this mean? Uncertainty. And what is uncertainty?
    What is uncertainty? Risk. Risk. What is risk? Jessica. Uncertainty. Uncertainty. Uncertainty regarding stocks. Uncertainty regarding water.
    What is finance about? Do you remember the portal center?
    And you bring in the future.
    I put one video. I’m not going to repeat that video. It was a short video, 10 seconds. It was in print and one humanist or one person with a microphone asked a fortune channel. Can you play in the future? He said yes, I got it. And then he.
    Stop.
    Sorry for using violence. Can you predict the future? Absolutely no. No, we cannot predict the future. But please, can we manage?
    An unpredictable future? Absolutely, yes. What is finance about? What is finance about?
    What is violence about?
    And what I am talking about Greece.
    Because of return. Why are you here? Why are you here at the end? Because of return.
    I mean, I’m here.
    And also because I love my work.
    I absolutely love my.
    At least there are people working. I don’t want to marry, but it should be the last 8 hours driving something. I like driving.
    And I’m driving. You understand what I’m saying? But I’m here because of window. My people drive something 8 hours each day because of window. Same route all the days, the same vehicle all the days.
    They enjoy. I I I respect absolutely the people that do these kind of things. I respect them.
    But when I’m here, why are you here? Why everyone wake up? It’s not everyone, but why most of people wake up every morning, early in the morning? Coso Rico. Coso Rico.
    What it’s about? An unpredictable future. And plus you don’t need to trust me. There are people that makes a a lot, a lot, a lot, a lot of money with values.
    A lot of work we have. What is finance about? Managing an unpredictable future in order to get what we do.
    Make sense?
    I put all of you in the point. I think that yes.
    Please, the piece of information that I’m going to give you is.
    You know, finance is heavy.
    How? How you understand the question?
    What is finance? Managing an unpredictable future. Managing an unpredictable future.
    Oh, oh.
    Oh, how are we going to do it?
    Oh.
    What is the thing we are going to talk about today? What is the how we information?
  2. Regarding violence.
    Finance has to do with pride. Manage.
    Unpredictable feature. All we do is with information, with information.
    Ron Powell rewards.
    What’s a?
    All all these things are piece of this.
    What are we going to do today? We are going to talk about information and we are going to classify.
    Oh, into three different players.
    What is information?
    Regarding fights.
    Best level of information.
    Historical prices. Prices of one.
    The prices of all these books.
    The level of information has to do with historical cases. Take one level.
    They call that public on public available information, not only not only historical prices, but also.
    The accountancy, balancing, yes, this is product information. There is a a piece of new regarding this disaster or there is another whole public information.
    Yes.
    We got basis.
    We think I’m going to start with the class and what is finance about managing in a better future and they will talk about information, yes.
    Let me.
    Let me.
    Look for.
    I have one problem. I don’t like this class is to be.
    Yeah.
    Great. So I have.
    Copy.
    Space.
    Then also.
    But I’m gonna say I I was thinking about start painting.
    But Italians, Italians, I have.
    OK.
    I have just shared this paper with you. This is one paper that has been written in the 1979, published in the 70s. It’s the most quote paper in finance history. If something is the most, if something is the most quote.
    Just two sides, one good and one bad. In this case, just one side, one good side that is is the most gold paper because it’s absolutely important and it’s also the most gold.
    Paper because not anyone understand the sense of the paper, the sense of target efficiency, yes.
    What do you have? Are you perfect?
    You know, are you perfect? Yes. No. Yes. No. Are you a disaster?
    There are people that, I guess, are you perfect? They say no. Are you? They say yes.
    Who is the person you should love the most in the world yourself?
    At least. Are you perfect? Are you a disaster? Who do you love more, your mom or your dad?
    These question, these questions are markets efficient.
    These questions are incorrect questions.
    Regarding your mom and your dad, you can ask the question you want. Sorry for talking about this, but if all of us are here, it’s just because mom and dad were no.
    Fighting.
    They were constructed in case as a different experience I this.
    Or anyone I ask for before we I do not understand what I’m trying to say.
    As who you should you love the most yourself, I love, I love. No matter how you look, it’s work love something good.
    For which who?
    You agree with me? All of you agree with me?
    Good.
    It’s not going to discuss for this one, yes. And we can discuss about I think here or I think because I this is a this is a another good idea, yes.
    Are you ancestor? Are you perfect? This is not a correct question.
    Which is the correct question?
    The correct question is what happens when you make a mistake?
    Or what can happen if you make a mistake in case you notice?
    And again, you notice and you have the correct attitude. What happens when you make a mistake and you have the correct attitude that you notice?
    What happens? We learn that you learn, and by learning and by learning we become better.
    You learn.
    Make a mistake. You are in class and you make a mistake.
    I get so happy because I have one opportunity in order to improve.
    And if we have a correct attitude class.
    Making mistakes is the best thing we can do.
    And who is without difference? Who is the most? Who do you say?
    Sorry, no, sorry. It’s not me. Yeah, who is the dumbest? Dumbest. Who she is is the worst in this class.
    And don’t answer it. Who is the dummiest? Who is the small store? Who is the you should don’t get red.
    Sofia, you should make you want to make a a brand in this class.
    Who is the one that makes more mistakes, more stupid things, more? Who’s the one that talk the most?
    Because we need the correct and we need the correct in order to make. The more mistakes you make, the better, the more we will learn to better. And I want you, if you don’t understand something, I want you to ask. I want you to.
    Sir, OK, what is the correct question? What happens when you make a mistake? And what happens when you make a mistake? You will learn.
    OK, next question. Am I sufficient or not?
    This is not the current question. The current question please is what happens when there is an inefficiency?
    What happens when there is an inefficiency? This is one new word from today. I have already said that please this word make a tattoo. I want you to be reading this word and I will. You don’t need to write it, but I will repeat it again and again after the meeting I will come back.
    What happens when there is an efficiency RB trash?
    Arbitrage. Arbitrage. What is arbitrage? Freelance. Freelance.
    I make a mistake and you discover that I have made a mistake. What you should do? Correct me and you correct me. At the same time you are doing two things. It’s a good business for yourself and also you are making the whole class better.
    Oh.
    You are making the whole class better. You understand the procedure. There is a market in physics.
    I detect market inefficients. I am making money with this by correcting this inefficiency and at the same time.
    I’m making money for myself. I’m making the market better. I make money for myself and I make market better, the services.
    Good. OK, I’m going to move quick because I’ve got too much quick, but please read what is written there. I would like a general idea is a market in which I’m going to.
    Together. We don’t. Oh, yeah, you’re very close. Don’t move. Don’t. Don’t see here. I’m not OK. Second line. I’m not OK. Second line.
    I’m a is I’m a in which places?
    You know, Thursday, I’m not getting enough. Sorry, sorry. Any mess or conclusion? Can you please say it? Sorry. First part enough, that’s the line. OK, a market in which prices always will reflect the bill.
    Jesus.
    Have you read that? Have you heard that a market in which prices fully reflect all available information is called efficient. You can do whatever you want to include a market in which prices fully reflect.
    Who will reflect information? What is information inside the class? Inside the class information is.
    You look at the price. All the information is inside the price. Market will be called efficient. When this will happen. Never. Never. Rush. Lenience. Not everyone will know Lenience.
    Like this is something for you understand what I’m saying. This is hard right now, but in the price reflect and then we we should say we are going to say now wise information. I have already told you wise information. Read it. Yes.
    After a discussion in theory, whatever, yes, 3 relevant information subsets, 3 relevant information subsets. First a week form.
    We told you we say information is just historical places.
    Before Welsh information, historical prices. We are going to call it a week for next letter semi strong form, semi strong form in which the concern is whether prices efficiently address all the information that is.
    Usually public, public, publicly available, publicly available.
    And oh, this is called the strong form and which one is the strong form?
    Which one is the strong form? Finally, the strong form test concerned with whether given informed investors or would have monopolistic access to any information relevant for price information.
    I’m talking about inciting training, inciting training. Make sense.
    I’m running out of that, but but I am happy.
    I am happy all of you are with me, more or less 3 levels.
    OK.
    Now I’m going to repeat same question from three different perspectives. The question is so simple.
    The market is efficient. No arbitrage is possible. The market is efficiency. No arbitrage is possible. Make sense.
    Yes.
    Is arbitrage possible? Always there is arbitrage possible. And because arbitrage, there is no arbitrage. Because people who are performing arbitrage, there is no arbitrage. Make sense.
    Yes.
    Is there arbitrage? Because there is arbitrage, there is no arbitrage. I’m going to repeat this same game with each one of the three levels.
    And in this letter, in this letter, I will show you what you want.
    Can I predict the future by looking historical prices?
    Yes, or not, how do we call people trying to predict the future by looking historical places?
    Technical analysis, technical analysis, technical analysis work or not technical analysis works.
    Or no. Sometimes yes, sometimes no. You understand what I’m saying if a market is efficient.
    In the weak form, technical analysis will not work.
    Because that’s why because the market is efficient and by your historical places I cannot play in the future. Make sense. Let me show you what is technical analysis so quick. Do you know what are Japanese scandals?
    Japanese. Japanese. Yeah. Japanese sticks. Candlesticks. No. Oh, you don’t have this knowledge. You don’t have this. God has this knowledge. So God is like, you have this knowledge or not? Yes.
    Is like a secret Japanese scandals. It should be. I know there are not, but because they don’t know, I want to make them think that is.
    Stick. No stick. I don’t read whatever. I am. I’m not with Google Chrome here. This is a Japanese candid stick. Yes, there is one stick for each day.
    One of these for each day. If it is green, it means that the stock has gone up. If it is red, it means that the stock has gone down. And if it is green, opening price and closing price, Max minimum and maximum price. And if it is red, it is the opposite. Make sense.
    What is technical analysis?
    I’m gonna Google. Just Google. Take Nicole. Ana, please. Yes.
    Have you ever see? Have you ever seen one?
    Have you ever seen one?
    One graph like this one.
    What are these? A lot of candlesticks. And this is technical analysis. People try to see trends. People see try to oh, this is there are a lot of fancy names. Dowbell. This is a camel bar. Then this is the dead cat bounce. All these names exist, I promise.
    And you can Google this name and you will see these patterns. You will see all these patterns.
    I can spend the rest of my whole life explaining things regarding technical analysis, and there are people explaining in YouTube videos how to make money with this. Make sense? Are markets efficient in the weak form?
    If markets were efficient in the weak form, technical analysis will not work. Make sense.
    Second level, all public information, all public information.
    Do you know one person called Warren Buffett? Who is the type of analysis he do? Who is the type of investment he do? He performs.
    It is called value investment, fundamental analysis. He takes accountancy, he compare with the market and he say oh this is cheap or not and he buy or sell regarding how he compare.
    Real price intrinsic value with the price intrinsic value. He compares intrinsic value. We will talk about this after the midterm. Make sense.
    Any question?
    Is one of them if I read.
    Yes, it’s easy to become rich as Warren Buffett. No.
    Are markets efficient in the semi strong form or Warren Buffett? No, or the rest of mortals?
    More than for I’m just kidding, but not too much. Market efficiency. Market Warren Buffett has worked a lot for the markets and because of that he has all his money and Warren Buffett has passed his whole life looking for market inefficiencies.
    In the semi strong form and the more inefficiencies he detect, the more money he was making. Make sense.
    And finally, and finally, first level of market efficiency is strong.
    These cases, these cases and with this, I want to go through the slides. Yes, I want to go through the slides. So I’m going to set up, but important information I have already.
    Yes, and we will go come back. I want to talk.
    This is the price of a company, yes, and this is time.
    Imagine that this time this is the only question. A question you’re going to find in the find in the litter regarding our deficiency has to do with this, the understanding this and we will review it next month, yes.
    The.
    The price, yes.
    Good news. What is going to make the price? Go on, he says. There are good news. The price will go up.
    Yeah.
    Strong form of of of the of the Mahometer, she tells me.
    That if there is, I don’t know where reaction before.
    The price goes up before the piece of information is being public.
    Base have a reaction before.
    Then this inside in play. Then the FCC will look for this. Who has all this? Oh, that has all this and that is the name of the CEO of the company. Then you will be.
    Inside information. Inside information is clear.
    Technical analysis is illegal. Value investing is legal. This case I’m not saying that markets are efficient. What I’m saying is if there is an efficiency, SEC will detect.
    And with that, you you see the point.
    OK, this.
    Thing regarding time, when markets react before you have several exercises there and we will review it on home. It’s not exercise, not medical exercises. It’s just a way form a strong form and when the reaction happens before.
    After.
    OK, let me go quick, quick, quick.
    What are we gonna do today?
    We’re going to talk about market efficiency. Efficiency prices fully reflect available information. Yes, efficiency does not mean whatever. Now there are three different levels that we form.
    The semi strong form and the strong form. Yes, each level correspond with one type of analysis, technical analysis, fundamental analysis or value investing and.
    Inside in information, yes, if a market is efficient in the strong form.
    All of three cannot exist, cannot work. There are no inside information. The fundamental analysis does not work and also technical analysis doesn’t make sense.
    Anomalies. There are tons of anomalies. There are a lot, a lot, a lot of anomalies because people make up companies and Monday people wake up and it’s time an anomaly was discovered. There was one person that published something. Markets are not efficient.
    And once someone publish up something saying, oh there is an anomaly, markets are not efficient, the anomaly disappear because once you make public the anomaly, the anomaly disappear. And because of this, this is the most quoted paper, yes.
    And this is just for saying that if you take CAPM, depending on how you get the data, if you use CAPM.
    If you use cape, take cape. You want to compare appet 10 years ago and appet today. Appet 10 years ago. What was a real company appet. Now it’s a cash club, a cash.
    Well, yes, you come back so quick.
    OK.
    Yeah.
    Eight years ago, Apple was growing. Apple was.
    What’s sorry? What’s the start? I think 10 years ago? Did you compare Apple 10 years ago with Apple today? Apple 10 years ago, we can pay dividends. We can pay dividends and Apple now pay out of dividends. What happened? You compare these two companies with no more information. What happened will tell you?
    Apple 10 years ago is **** and Apple today’s an incredible good company.
    What happens in real life that we are using same food in order to compare different things? Yes, again, campaign is just comparing with the market. But what if you compare small companies with big companies? What if you compare one company from one sector with another one? What if you compare one growing company with one?
    You understand the point?
    Regarding this, you don’t need to know anything for the midterm. You don’t need to know anything from the midterm. But this is just here to say that I want. I’m looking for a hammer. There is no hammer, yes.
    But Captain, Captain, just relate. Captain is our regressive commission, including the stock and the market. If you just have a hammer, we just see nails this.
    You just have a hunger. You just seen AIDS. What? What Fama did years later?
    This is not going to be us. This is just general culture. Pama create one model, one model and say instead of just having one beta, you want to have two other beta, one beta with the size of the company.
    Another data regarding the book to market ratio. We’ll talk about book to market ratio after the week.
    He produced two more more, two more factors. Then five years later he produced five more factors. Whole people work now in the markets with tons of betas, not just one beta regarding the market. It is one beta regarding oil, one beta regarding dollar, another one regarding the.
    Makes sense.
    Well, I’m sorry for.
    Any questions?
    We will come back to the all of these ideas after the midterm when talking about arbitrage and also next class we will see the two exercises that can be asked that are so simple, yes.