2.5

Question 1

informational market efficiency

Answer 1

asset prices reflect available information, assets are traded equal to values based on all info

Question 2

weak form informational market

Answer 2

reflecting available data on past prices and volume, addresses issues of technical analysis

Question 3

strong form informational market

Answer 3

all publically and privately available information, whether any attempts earn consistent and suprerior risk adjusted retrns, includes insider trading

Question 4

3 trading strategies

Answer 4

technical analysis to weak form, fundamental to the semi strong form and insider trading strong form

Question 5

6 factors driving informational market efficiency

Answer 5

greater value of asset, greater competition for profits and losses
greater trading frequency increases competition by providing greater incentives for investors
low levels of trading frictions facilitate higher competition by encouraging arbitrage
assets tend to trade at prices close to their informationally efficient values, access to better info
assets wil trade at prices close to informationally efficient values when there is less uncertainty about their valuation

Question 6

nominal interest rate

Answer 6

return measured in terms of a currency without downward adjustment for potential effects of positive inflation

Question 7

inflation

Answer 7

rate of change in the value of a currency relative to a basket of real \assets with positive inflation rate indicating the value of the currency is declining

Question 8

fisher effect

Answer 8

nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate when interest rates are expressed as continously compounded rates

Question 9

real interest rate

Answer 9

annualized rate earned on a default free fixed income investments after adjusting the nominal rate downward for the effect of inflation

Question 10

unbiased expectation theory

Answer 10

fixed income offer same expected return over same time interval, risk neutral modeling, all interest rates based on expectation

Question 11

liquidity preferance theory

Answer 11

long term FI securities equate to greater returns, risk premiums are positive and increase bond longevity

Question 12

market segmentation theory

Answer 12

preferred habitats of borrowers and lenders influence the expected returns of each maturity range, equating to various risk premius.

Question 13

relative pricing model

Answer 13

relationship between two prices

Question 14

absolute pricing model

Answer 14

describe a value or a price level based on underlying economic factors

Question 15

spot market cash market

Answer 15

transactions that involve immediate payment and delivery

Question 16

binomal tree

Answer 16

possible outcomes in a variable such as security price or interest rate by modeling uncertainty as two movements, upward and downward