Abstract
In this document we will show how you can create a portfolio with two stocks which would have an ER of 8%, and what the SD of such a portfolio is. We also explain the concept of Efficient Markets Hypothesis and the difference between the Weak, Semi-Strong, and Strong forms of it. Finally we try to explain what short sales are and why they are dangerous for investors, which is also why governments often restrict their use. The efficient markets hypothesis is based on the idea that information is reflected in security prices. In fact, if investors had the information that buying a given stock will have a positive NPV, they will be tempted to buy it and it would then drive up the stock price. In a similar way, if investors are aware that selling given stocks will have a positive NPV, the price of the stocks will go down. The fact that competition among investors works to eliminate the positives NPV trading opportunities is known as the basis of the efficient markets hypothesis. This theory implies that securities are fairly priced based on their future cash flows and given all the information available for investors.
