6.3. Market Efficiency and Investment Strategies

Question 1

Different definitions of earnings surprise.

Answer 1

• Standardized unexpected earnings (SUE)
- Difference between the earnings of the current period and the year before
- Only exact if market is weakly efficient
• Forecast error
- Difference between announced and expected earnings

Buying stocks with better than expected earnings yields in abnormal returns which questions semi-strong market efficiency

Question 2

Momentum Strategy

Answer 2

• Buy the 10 % of stocks that performed best last period
• sell short 10 % of stocks that performed worst last period
• Rebalance every period

Yields in abnormal returns which questions the weak form of market efficiency