410 Final Flashcards
financial asset - what 3 things determine value of fin. asset and how fin. markets enable us to offload risk
written obligation to FCFs
–timing, amt., risk
offload risk by insurance for ex.
what are 2 ways fin. mkts. help allocate resources to their most beneficial use
- -liquid asset
- -broker’s role in trading securities
making prices transparent and informative - make prices transparent and help aggregate vast amts. of info. into a single # in the market place
- -can be easily bought or sold at fair value
- -act as a middle man - arranges transactions btwn buyer and seller (REAL ESTATE is ex. of brokered mkt.)
buy 1 hsare of target for $26 at beg. of year - over year value of stock grows 16% - what is payoff at end of year?
26*(1.16) = $30.16
know diff. btwn profit, gross return (what sell for / what you paid for it), net return (just subtract 1 from gross)
buy share for $54 - in 1 year sell for 65 - after rec. dividend pmt. of $8
- -profit?
- -gross return?
- -net return?
- -div. yield?
- -cap. gains?
profit = 19
gross return = 1.35
net return = .35
div. yield? = (8/54) = 14.8%
cap. gains = (65/54 - 1) = 20.4%
(75bps = .75%, = .0075)
effective 2 yr. return on investment is 10% - what is EAR?
Eff. quarterly return = 5%, what is effective 3 year return?
EAR on investment is 13% - what is monthly return?
effective monthly retun is 2% - what is EAR
eff. 2 year return is 23% - what is effective quarterly return?
(1 + X)^2 = 1.10 ….. X = 4.88%
(1.05)^12 = x …. x = 1.795 —> (1 + x)^1 = 1.795, x = 79.5%
(1 + x)^12 = 1.13…. 1.13^1/12 -1 = 1.02%
(1.02)^12 - 1 = x …. x = 26.8%
(1 + x)^8 = 1.23….. 1.23^1/8 - 1 = 2.62%
APR is 14% with ann. compounding - what is effective quarterly rate?
what is effective annual rate?
what is eff. 2 month rate?
14/4 = 3.5% eff. quarterly rate
EAR = 1.035^4 - 1 = 14.8&
2 mo. rate = 1.148^1/6 - 1 = 2.32%
ch. 2 conceptual
1. firms often acquire STD by issuing ____ to public
- Treasury notes have maturities ____ and Treasury bonds have maturities ____
- what is a Eurobond
- the bid price of a treasury bond is
- commercial paper
- up to 10 years (T notes), from 10-30 years (T bills)
- euro-denominated bond issued in Moscow
- -Russian denominated bond issued in London - the price at which a dealer in treasury bills is willing to buy the bill
- fed. funds rate is
- real estate generally trades in a
- a limit buy order is an order to
- the third market is
- the NASDAQ stock market is
- which mkt. consists of indiv. or firms that stand prepared to sell from or buy to add to an inventory of securities?
- rate banks charge each other for over night loans to meet reserve requirements
- brokered market
- buy a stock when price falls below certain level
- loose networkof brokers and dealers
- a hybrid exchange and dealer market
- dealer mkt.
diff. btwn primary and secondary market - who are buyers and sellers in each market?
PRIMARY
—market for new security issues - in this mt. the sellers of securities are firms or gov. who want to raise capital and the buyers are investors
SECONDARY
- -mkt. for already existing securities
- -both buyers and sellers are investors
Look at characteristics of hedge funds
- funds are heavily regulated by SEC
hedge funds diff. than mutual funds
- -hedge funds have less regulation bc part of private partnerships and free from SEC refulation
- -permit investors to take on many risks unavailable to mutual funds
- -however, hedge funds req. higher fees, lock-up periods, and provide less transparency to investors
what are advantages and disadvantages for buying ETF vs. index
- ETFs can be bought and sold anytime like regular stocks at real-time prices
- ETFs can be sold short
for INDEX
1. when trading index funds you avoid the explicit and many of the implicit costs of trading on the secondary market - you simply buy at the 4pm NAV
NAV - mutual fund manages protfolio of securities worth $120M
- -fund owes $4M to its investment advisors and another $1M for rent, wages, other exp.
- -Fund has 5M shares
net asset value
- -value of each share
- -assets minus liability expressed as per share basis
NAV = (mkt. value of assets - liabilities) / shares outstanding
NAV = (120 - 5) / 5
= $23 per share
most mutual funds are OPEN END funds - investment comps. raise capital by issuing shares to public - use capital raised to buy portfolio of fin. securities - each share is partial ownership in the firm
- -rather than exchange traded securities…investors buy and sell shares of open-ended fuds directly from investment company itself (Charles Schwab)
- –price you pay for share of a mutual fund? - all new orders during a given day pay the 4pm NAV!!! - When buying…they show the $ amt. not # of shares - at end of day…calc. 4pm NAV and all orders are executed at 4pm NAV (using 2nd mkt. info)
- -if buy orders exceed sell orders…the fund issues an appropriate # of new shares - or if sell orders exceed buy,,,fund buys back shares
NAV EX.
1. at 4pm Mon. A = $36B, L = $1B, 900M shares outstanding
- at 4pm Tues. fund assets inc. 1% that day - in addition, fund rec. 900,000 sell orders and buy orders of $1.4M that day
- -at what price will orders be executed (NAV) - how many new shares does fund issue or buy back Tues?
- what are total asset and shares outstanding at end of day on Tues after acc. for new order flow?
- what return did long-term shareholders earn from 4pm on M to 4pm on T
- NAV = $35 / .9 = $38.89
- $36*(1.01) - $1B / .9B shares - $39.29
- -buy and sell at $39.29 per share - $1.4M - $900,000 in sell orders = 500k net new order flow
500,000 / 39.29 = 12,726 additional new shares fund will ISSUE
- total shares outstanding = 900M + 12,726 = 900,012,726
total new assets = $36.36B + $500,000 = $36,3605B
- return = 39.29 / 38.89 - 1 = 1.029% (higher return than funds assets growth of 1% bc of leverage)
front/back end load
Charles Schwab acts as a broker for Vanguard - so when invest in Vanguard through middleman, charges a fee called front end load
ex. put in $1000 of Vanguard in small-cap fund and CS charges 4% fee
1000*.04) = $40 in fees –> so only $960 actually invested in Vanguard
return on Vanguard to break even = 1000/960 - 1 = 4.2%
same with back end but on the back of equation - each have the SAME IMPACT on returns
- -when we pay front end fees we give up fraction of our principal that is invited and ability to generate returns on that portion that is lost
- -on back end load - we earn returns on FULL principal inveted, but then pay fee that is a fraction of the original principal and returns earned on that principal (so front could be better or worse…depends how mkt. behaves)
annual fees
–what are 12b-1 fees
investors always pay ann. fees when investing in mutual fund - are operating expenses - admin., advisory
–called ann. fees or ann. expense ratio
12b-1 fees - are ann. fees charged by a mutual fund to pay for their authorized brokers, marketing, and distribution costs
why does introduction of front end load cause req. return to depend on holding period (time amt.) – front end load reps a fixed cost that is spread out over more years - shorter you hold it, higher fund return has to be to make up the cost
an open-end fund has NAV of 10.7 per share - sold with front end load of 6^ and ann. expense ratio of 2%
- what is offering price per share?
- assume invest $10,000 in fund and hold shares 5 years - what is total 5 year return if NAV inc. by 7% each year
- without any fees what would be your total 5 yr return if NAV inc. 7% every year
- net of fees, what is effective ann. return on fund per year if NAV inc. 7% each year
- P = 10.7 + .06*P
P = 10.7 / (1 - .06) = $11.38
B. .94 *(1 + .07 - .02)^5 = 19.97%
C. return = (1 + .07)^5 = 40.26%
D (1.1997)^1/5 -1 = 3.7%
choosing portfolio weights
as prices change portfolio weights also change - to maintan a portoflio with given weights investors will often have to REBALANCE their portfolios by buying/selling securities to keep portfolio weights from moving off target
indices - index is a hypothetical portfolio of securities uniquely defined by set of portfolio weights and initial investment amt
- –companies report value and return of index each day - investors use info. to understand how broad macroeconomic events influene prices for a large # of securities
- -imp. is S&P 500 and Dow-Jones industrial average
akways define portfolio weights using info. known at the BEGINNING of the investment period
value weighted portfolio
- value weighted portfolios
–create portfolio where target portfolio weights don’t change!!
w(t) = mcap (stock t) / sum of all stock’s mcap’s in my portfolio
–stocks issued by larger companies will carry a higher weight in my portfolio
ex. have $500k to invest and want to create value weighted portfolio - need to see how much to invest in stocks A, B, C
OH so we will be given a chart with each firm’s (A, B ,C) price per share and total # shares which we use to find market cap of each and then sum!!
- -we take market cap of A and divide by market cap of sum to get weight of A
- -same for B and C - should add to 1 bc just dividing each firm’s mkt. cap by total of the stocks we want to invest in
then multiply each weight by the amount of money we have to invest (Ex. A = .357) - do (.357 * $500k = $178.571 K to invest in A
- -price per share of A is 8, so buy 178.571 / 8 = 22.321K shares of A
- -do same for B and C
- -require no rebalancing!! - once created…will always be a value weighted portfolio
- -also called “BUY AND HOLD portfolios”
VALUE WEIGHTED INDEX can be thought of as hypothetical value-weighted portfolio
—S&P 500 is value weighted!! - selects among the 500 largest companies (using qualities such as liquidity, fin. stability, company) - make it broad representative of the economy
price weighted index
Dow Jones!!!
- -based on daily average price not return
- -buy an EQUAL # of SHARES of every security
- -so buy x shares of 3 diff. stocks - so total equity invested in portfolio is x*P1 + xP2 + xP3
weight in each security depends on its Price!!
- -stock SPLITS influence PRICE weighted portfolios
- -price cuts in half and # of shares held doubles
find average stock price
= (10 +11 + 19) / 3 = 13.33
need divisor (d) to find the average price = solve as if split didn’t happen
as long as there are no splits…rebalance does not need to happen
—splist do not however affect value weighted portfolio’s bc value is the same (split price and double shares = same mcap) – only changes if they mkt. cap changes
equaly weighted portfolio
the amount of MONEY invested in each security is the same!!
–so weights are exact same!!!
if invest 1/3 equity (1000) in A,B,C each has a weight of $3333.3 which you multiply by the return to find portfolio return!
find value to be (1/3)(.06)+(1/3)(-.1)+(1/3)(.1) = .019 –> weights are same as 1/3 but find return by looking at price changes from periods
then ask if level of eq. w portfolio is 1055.4 at time 0…what is its level at time 1?
= 1055.3 * (1.019) = 1074.54
find va eq. portfolio - NOTICE THERE WAS A SPLIT…went from 10 to 8 - solve without split
return A - 8/10 - 1 = -20%
then do all returns divided by 3 (divisor) = -2.57%
tilting
if tilt always maintain 100% weight in the original portfolio
–tilt by financing with borrowing or lending
if tilt towards a certain stock in portfolio - buy rf bonds in order to do so (or short another) - gives you a negative weight
–ex. tilt 5% towards FB,so borrow 5% of equity at rf rate and use money to invest in FB - so have negative weight in rf so weights sum to 1
or if tilt away - we sell 5% shares of FB and use money to invest in rf bonds
–how to increase exposure to a SINGLE security
say “you have a weight of 1 in the original portfolio, and additional weight of .1 in Stock A an an additional rf weight of -.1
if tilt towards - you get a negative rf rate from borrowing at the rf rate
–if tilt away - you get a negative (or dec.) holdings in stock you tilt from but use money to buy/invest in rf bonds
Short selling
enables investors to profit from neg. info. about a security, even if they don’t own it
- -ex. hear stock is selling for $60 and going to drop to $50
- -could borrow from someone who owns it and sell it in the market for $50
- -it becomes $60 in your pocket but a liability to return the security to the owner at some point
- -so if stock drops $50 - you buy it on the market and give back to owner… you profited $10 from the short selling
remember when annualizing
do 12 for monthly and 250 for annual
- -bc 250 trading days in a year
- -do * sq.12 for st. dev.
law of diminishing utility
humans are risk averse
- -this law says that the marginal utility (Extra utility) you get from an additional dollar of wealth dimishes or shrinks as you get wealthier
- -as you get wealthier, each additional dollar of wealth inc. well being, bu to a smaller extent than previous dollars
- -shows that the pain we feel from loss is greater than the satisfaction we feel from a gain of equal magnitude
- -implies we don’t like utility
CAL line
investors have no control over expected return and volatility of a security - determined by company’s earnings and risk
–but they can control portfolio weights!!! to MAX return and MINimize volatility
think of portfolios with a single risky asset - (1-w) is risk free bonds - assume rf rate represents rate of borrowing and lending - rate earn if lend and rate pay if borrow
–so E[r] = w(r) + (1-w)*(r)
and st.dev. = (w risky asset) * volatility of that asset
every risky asset has its own Capital allocation line - represents tradeoff btwn risk and return (risk on x and return on Y)
- -portfolio invested in 100% rf bonds will be ON the Y-axis bc no risk - so that is the point our line starts at = Y intercept
- -CAL line cont. with w increasing in risky asset and risk increases as well as E[r[
two fund separation theorem
the optimal portfolio for any investor with any given set of risk-preferences lies on the CAL for the risky asset with the MAX Sharpe ratio
SLOPE OF CAL IS THE SHARPE RATIO!!!!!!!!!
—so if MAX slope = MAX sharpe ratio
can find with combo of two “funds” or with 1. rf borrowing/lending position and 2. fund that represents asset with MAX SR
two steps under theorem
- identify combo of risky securities that results in the portfolio with the MAX SR
- determine the appropriate location for the investor on the CAL for the portfolio identified i step 1 according to indiv.’s risk preferences
they were comparing investing in Sharpe Mosaic or Vanguard - calc. highest SR and found Vanguard’s is higher - in best interest to invest in Vanguard along it’s CAL bc MAX Sr
covariance
the average PRODUCT of the 2 forecast errors (multiply the single deciations of security 1 and 2 then find the ave. of the product)
- -each dot reps a joint outcome (X is outcome for A and Y is outcome for Y
- -X AND Y AXIS IS CENTERED ON THE MEANS
Covar b twn 2 securities is positive = securities tend to move together, if negative they move in opposite directions
COVAR GIVES US THE SIGN!!! numbers don’t matter as much as the sign
Look at negative dependence and positive dependence and independence
- –positive dependence: if portfolio does well, residuals are positive too!! - when covar btwn x and z is positive and it should be 0 - low values of rp and negative residuals and vise versa
- -negative dependence: btwn X and residuals is when rp is low but residuals are HIGH
Correlation
estimates strength of dependence
CORR. = COV(x,y) / (st.dev. x * st. dev. y)
regression
run a regression to fit the scatter plot - line of best fit gives estimate of condition E[r]
- -if slope (b) is positive…know that tilting towards stock will AMPLIFY portfolio - volatility will increase
- -lines of best fit should MINIMIZE SQUARED RESIDUALS
a = exp. return ons tock given portfolio return is 0
b = cov(x,y) / VAR(x)
a = ave. Y - (b*Ave. X)
the slope of the regression line is where Y return on security and X return on portfolio is called BETA!!!
–portfolio beta of a security tells us how uch we expect the stock return to change given a 1% change in the portfolio return
residuals
zt = yt - (a + bx)
–shows the variaation in “Y” that is driven by variation in x and t
Var (Y) = Var (b*X) + Var (z)
R^2 = B^2*Var(X) / Var (Y)
- –numerator is systematic risk / total risk
- -or find portion of firm specific risk by var (Z) / var ( Y)
2 RULES!!!
- Ave value of residual is 0
- covar btwn residual and X is 0
- -showing that z and x are independent and have no relationship
regressions with multiple explanatory variables
- -Y is dependent and x1 and x2 are explanatory
- -a is regression intercept
b1 determines influence of 1st exp. var. and b2 explains 2nd (= 2 betas for both systematic risk factors)
y = a + b1x1 + b2x2 + z
z = y - (a+ b1x1 + v2x2)
- if we run a regression where return on stock A is dep. var. and return on p is explanatory, then we interpret intercept as…
- the slope in the regression is
- there is NO good economic interpretation of the intercept in the regressio
- the stock portolio’s beta
MAKE SURE TO DO VARP AND STDEVP!!!!!!
to get CAPM from arbitrage pricing theory, we need to assume all of the following
- market return is only systematic factor
- there are no arbitrage opportunities
- risk-free portfolios earn the risk-free rate
hedged portfolio
has no systematic or firm specific risks
when using stat rule 5 to find rate of change in volatility…the thing that has influence
is BETA! bc stat rule 5 is beta * the st. dev. of portfolio - and st. dev is always positive!!
SO - if the beta is positive then inc. weight will inc. portfolio volatility, but if beta is negative…it will dec. overall p volatility
efficient frontier
the set of all portfolios with the lowest possible st. dev. for any given level of expected return
tangent portfolio has the highest SR - so it is the CAL line for the optimal portfolio or p with highest SR
three things that influence the price of a security
- size of CFs
- TIMING of CFs
- DISCOUNT RATE
1st 2 determined by operations of the firm
–market as a whole determines the appropriate discount rate
three main assumptions of the CAPM
CAPM helps us understand why req. returns diff across assets
- investors have the same forecasts of returns, volatilities, and correlations
- -clearly NOT true - sometimes disagree on forecasts…but should be general consensus - investors only care about MAXimizing the SR of their portfolios
- -some avoid tobacco, sin stocks - others choose securities bc tax implications - but all want high returns - all shares of al securities are held at some price
the representative investor
- –the one big investor - prices are determined by behavior of rep. investor…or aggregate market
- –assume indiv. investors are price takers
equilibrium price
= price at which there is no excess or insufficient demand for the security
–price where rep. inv. is happy with his holdings - if not, he will want to buy (Excess demand) or sell (insufficient demand)
rep. investor is only satisfied with his holdings if his portfolio represents the portfolio with MAX SR
- -when prices are in equilibrium…the alpha of every security relative to the portfolio held by rep. inv. is zero
sometimes we calc. alpha as zero and found E[r] (using CAPM) – then see price where that return can be realized
—but if news comes out about company…could inc. expected return - making alpha positve
PRICES are in equilibrium when the alpha is zero!!!
rep. investor and max SR
rep. investor cannot alter his holdings bc he represents the ENTIRE MARKET
- –so when prices in equil…alpha of every security is zero relative to static portfolio held by rep. inv.
- –so when prices in equilibrium..portfolio with MAX SR is held by rep. inv.
wi = value position in . i / total equity
he owns all share of all securities so the denominator is the total market cap - total number of securities in economy
SHOWS REP. INV. OWNS THE VALUE-WEIGHTED PORTFOLIO OF ALL SECURITIES
ex. with rep. investor
firm will liquidate in 1 year - expect div. of $15. beta is 1.3 and rm = 9% and rf = 2%
- what is equilibrium price
- if news hits that price drop to $15, what is alpha after news hits?
- given alpha above, is rep. investor satisfied with holdings?
- how to get prices back to equilbirum
- req. expected return = .02 + 1.3(.09-.02) = .111
15 / 1.111 = 13.50 = equilibrium price
- when news hits E[r] falls to
14 / 13.5 -1 = 3.7%
so alpha of stock becomes
.037 - .111 = -.074
- no not satisfied - he would want to tilt away from A
- rep. investor cannot tilt away from A, that means all investors have to sell some of A - but he can’t sell bc he represents everybody
- -shows price of stock A must drop bc insufficient demand - causes expected return and alpha to increase
price will drop until ALPHA REACHES ZERO
14 / X = .111 = 12.60
so when news hits, price will drop from 13.5 to 12.6 - alpha will be zero and rep. investor is satisfied
CAPM on beta
beta is only things that matters to determine the req. expected return
- stocks with higher positive betas are adding a lot of risk to mkt. portfolio
- -if beta is 0 - CAPM says mkt. is only factor so should earn rf rate - securities with negative market betas are insurance against drops in mkt. portfolio
equilirbium mkt. risk premium -
E[rm] - rf = +Ast. dev mkt ^2
- -st. dev mkt. ^2 is variance of mkt. portfolio
- -A represents risk aversion of rep. investor
CAPM key points
- expected return for any arbitrary stock A hould be = to CAPM formula
- portfolio with highest SR is the value weighted portfolio of all securities
- the efficient frontier is CAL for market portfolio
CAPM scenario 1 - possible or not
A: E[r] = 1%, st. dev. = .2
B: E[r] = 16% and st.dev. = .05
POSSIBLE according to CAPM
- -CAPM cares about beta, not st. dev
- -even though A has high st. dev…a lot of this could be firm specific diversifiable risk - don’t have enough info. to determine
CAPM scenario 2 - possible or not
A = E[r] = 1%, Beta = 1.2 B = E[r] = 16^, Beta = .5
NOT possible - CAPM says stocks with higher betas should have higher expected returns
CAPM scenario 3 - possible or not
A: E[r] 1%, Beta 1.2
B: mkt: E[r] 16%, Beta 1
RF = 4%, beta = 0
NOT possible bc if prices in equilibrium, CAPM says expected return would be 18.4% - but here expected return for A is 1%
CAPM scenario 4 - possible or not
mkt. E[r] 10%, st. dev. .18
B E[r] = 16%, st. dev. = .3
RF E[r] = 5%, st. dev. = 0
NOT possible - CAPM says portfolio with HIGHEST SR is the market…but sharpe for B is .36 and mkt. sharpe is .28
only way to create portfolio with higher SR than market is to trade when prices are OUT of equilibrium
ex. of alpha
investor receives div. of 11 - his return is
11 / 7.69 = 43% - but his req. return was 30%
so his alpha would be 43% - 30% = 13%
historical alpha
- -fund manager has earned ave. return of 18% per year over last 20 years
- -mkt. p only averaged 10% - if beta of manager’s profile is 1.9 and rf = .01, what is his historical alpha?
using a regression to estimate alpha
.18 - (.01 + 1.9*(.1 - .01)) = -.001
tilting mkt. portfolio towards this fund manager’s portfolio will only lower our SR
rp,t = return on fund manager’s portfolio, rm,t = return on market value-weighted p, and rf,t = return on US t bill
b = Cov (rp,t rm, t) / VAR (r m t)
same as portfolio beta - bc slope!!!
a = Yave. - B* X ave
- calc excess returns by subtracting t-bill (rf) from mutual fund and market each month - in separate column
- run a regression in excess - make excess returns on fund Y variable and excess returns on market your X
top # intercept = alpha
bottom # X var = beta
–can look at CI to see if reject alpha is 0 or not
- rep investor owns the
- holding all else constant, a higher price implies a ___ E[r]
- assume security A has st. dev. of .8 and market beta of . 0 - CAPM states rep. inv. is happy if it earns return = to ____ bc on average tilting towards secuity A ___ on his portfolio volatility
- value weighted portfolio
- lower
- rf rate, has no impact on
efficient markets hypothesis
competition among investors to uncover useful info. for prices causes prices to respond very quickly once any news is released
right question is not are markets efficient….but “how efficient are markets?”
—any news causes price to adjust to meet demand until expected return falls back to k
E[D] / P - 1 = k
–E[D] = exp. dividend to be paid and P is price of assets - k = req. return
weak form, vs. semi strong, vs. strong form efficiency
- WEAK FORM EFFICIENCY
- -prices reflect any information in the history of past trading data, including patterns and trends in past prices
- -impossible for analysts to earn ALPHA using technical analysis - practice of searching for alpha analyzing past info., movements, trends - SEMI-STRONG-FORM EFFICIENCY
- -prices reflect ALL PUBLICLY AVAILABLE INFO, - including press releases, news reports, accounting stmts.
- -says it is impossible for analysts to earn alpha using fundamental analysis, searching for alpha in accounting ratios, DDM models and other public info.
- -after announcement of good news, response lasts for about 1 min….but for bad news it is usually about 15 min (think short window to respond and have to act quick…also if bad news want to short it but it takes longer to do that) - STRONG-FORM
- –prices reflect ALL RELEVANT INFO. including insider info
- -impossiblet o earn abnormal returns using ANY info
- -if mkt. is strong form - then has to be semistrong an weak form
- -if semistrong form…has to also be weak form
Berk and Green (2004)
mkt. can never be completely semistrong efficient - bc then there would be no rewards for doing all the research - no incentive for anyone to do investment research
- -but if no one does research…no info. gets incorporated into prices and then the mkt. becomes inefficient
if good manager - gets more assets to manage
- –but i equilibrium, the fund’s alpha after fees is 0
- -active members generate alpha but they are the ones who reap benefits for doing it
assume when a comp. announces an unexpectedly large cash div. to shareholders - in efficient mkt. w/o info. leakage, one might expect
an abnormal price change at the announcement
which of the following would provide evidence against semi-strong form of efficient market theory
LOQ P/W stock tend to earn positive alpha over the long run
According to efficient market hypothesis
positive alphas on stocks will quickly disappear
price anomaly refers to
price behavior that differs from the behavior predicted by the efficient market hypothesis
which is evidence against the weak form of efficient mkt. theory?
A strategy that sells stocks after the mkt. increases by 5% and buys stocks after mkt. drops by 5% earns positive alpha
why in efficient market does there need to be rewards for inv. research
no rewards = no one does research = no one uncovers info. and trades on it = prices can’t reflect this info = markets become inefficient
if price is equal to PV of FCF then…
the E[r] is equal to discount rate
not true bout PS
ownership of PS entails voting rights
