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The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parameters of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value that an investor would place on the ability to invest to exploit the apparent anomaly is also derived and illustrative calculations are presented for the Fama-French SMB and HML portfolios, whose returns are anomalous relative to the CAPM. An asset pricing anomaly is a statistically significant difference between the realized average returns associated with certain characteristics of securities, or on portfolios of securities formed on the basis of those characteristics, and the returns that are predicted by a particular asset pricing model. What is anomalous with respect to one model may be consistent with the predictions of other asset pricing models. For example, an excess return associated with a security’s dividend yield is anomalous with respect to the basic Capital Asset Pricing Model but is consistent with extensions that incorporate investor taxes. Some anomalies are inconsistent with any known rational asset pricing model; they appear to represent “money left on the table”; such examples include the

We investigate whether measures of intangible capital based on advertising and R&D can explain variation in Tobin’s Q ratio for the pharmaceutical & chemical industry using data from 1982 to 2001. The study is motivated by prior literature studying this relation in other industries, recent literature investigating intangible capital in this industry, and the larger controversy about whether stock valuations have been high due to irrational investors or large investment in intangible capital. We find that our measures of intangible capital are statistically significant determinants of Tobin’s Q and explain twenty percent of the variation in our sample.

A market is said to be efficient with respect to an information set if the price ‘fully reflects ’ that information set, i.e. if the price would be unaffected by revealing the information set to all market participants. The efficient market hypothesis (EMH) asserts that financial markets are efficient. On the one hand, the definitional ‘fully ’ is an exacting requirement, suggesting that no real market could ever be efficient, implying that the EMH is almost certainly false. On the other hand, economics is a social science, and a hypothesis that is asymptotically true puts the EMH in contention for one of the strongest hypotheses in the whole of the social sciences. Strictly speaking the EMH is false, but in spirit is profoundly true. Besides, science concerns seeking the best hypothesis, and until a flawed hypothesis is replaced by a better hypothesis, criticism is of limited value. Starting in the 16th century, this note gives a chronological review of the notable literature relating to the EMH. History of the Efficient Market Hypothesis