Asset Pricing Models

Question 1

What is an Overreaction?

Answer 1

• If good news, ppl may get excited and stock prices rise

Question 2

What strategy if Overreaction occurs?

Answer 2

• Reversal Strategy = Current best stocks we SELL and buy WORST ones for future potential profit
• Price to Earnings Multiple = how much you need to pay in order to get $1 in profits

Question 3

What is an Underreaction?

Answer 3

• Ppl do NOT react as heavily

Question 4

What are some strategies for underreacting?

Answer 4

Momentum Strategy - Buying BEST STOCKS in 6 mnths and selling WORST stocks (opposite of reversal strategy)

Question 5

What is Earnings Surprise?

Answer 5

Actual Earnings - Predicted Earnings

Question 6

What is a positive surprise?

Answer 6

Actual Earnings is GREATER than predicted

Question 7

What is a negative surprise?

Answer 7

Actual Earnings is LOWER than predicted

Question 8

What is Post-Earnings Announcement Drift?

Answer 8

• Theory that market is slow to respond to earnings info

Question 9

What are some contributing factors to Post-Earnings Announcement drift?

Answer 9

• Other firms announcing their earnings (hence, consumers get distracted)
• Announced on Fridays (end of week and are lazy)
• Customer’s OTHER COMPANIES announcement