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Efficiency

• Reflects the amount of wasted energy.

 
 Referenced Terms
 Capital asset pricing model: Abbreviated CAPM. The basic theory that links together risk and return for all assets. The CAPM predicts a relationship between the required return, or cost of common equity capital, and the nondiversifiable risk of the firm as measured by the beta coefficient.Abbreviated CAPM. An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium.Is a tool that relates an asset's expected return to the market's expected return. It combines the concepts of efficient capital markets with risk premiums. The idea of capital market Efficiency assumes immediate instantaneous -response to perfect or near perfect information. The risk premiums relate an investment to the market's risk-free or riskless rate of return. Typically, this risk-free rate is viewed in terms of principal safety for short term U.S. government obligations. Here, beta relates the volatility of an asset to the market.

 External efficiency: Related: pricing Efficiency.

 Fixed asset turnover: Measures the Efficiency with which the firm has been using its net fixed, or earning, assets to generate sales.

 Market efficiency hypotheses: Refer to theories which try to explain financial market behavior. Some hypotheses state that the markets are rigorously efficient and operate by an immediate discounting of perfect information. Other theories state that the markets are relatively inefficient, particularly when socially-oriented goals are also to be considered. Other hypotheses state that information is good or even very good but not perfect. Also, not all market participants believe or simultaneously act on new data or information. The latter theorists believe that the markets try to attain pure Efficiency. However, they also recognize that competition breeds asymmetrical change and this influences the discounting and adaption processes. A simple example will highlight this view. While improvements in technology are reducing costs and communication times, not everyone updates their systems given each and every change in chip speeds and processing power. To do so would be too expensive and this creates one of example of a marketplace paradox.

 Marketplace price efficiency: The degree to which the prices of assets reflect the available marketplace information. Marketplace price Efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.

 
 Related Terms
 Capital market efficiency
External efficiency
Informational efficiency
Market efficiency hypotheses
Marketplace price efficiency
Pricing efficiency
Semi strong form efficiency
Strong form efficiency
Weak form efficiency

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