5.2

Question 1

• Definition Contrarian strategy

- What is the opposite str called

Answer 1

Buy past losers, sell past winners. Opposite is called Relative Strength Str.

Question 2

3 plausible sources of returns. And which one is important?

Answer 2

1. Cross-sectional dispersion in expected returns: a similar component in a Winner stock
2. Serial covariance of factor-related returns
3. Average serial covariance of the idiosyncratic component => only source

Question 3

Why do both, contrarian str and relative strength str, have positive returns?

Answer 3

They are positive in different holding periods.

• contr: in s-t (1m/ 1w) or really l-t (3-5y)
• relative: (3-12m)

Question 4

Efficient market vs inefficient market

What kind of returns?

Answer 4

Systematic risk bearing returns - firm-specific returns