CF revision Flashcards
Expected return
Sum of (Probability times return)
Variance
Sum of (probability times the rate of return - the mean rate of return)^squared
Standard deviation
The square root of the variance
Explain market efficiency
how stock prices reflect available and relevant information
Defining characteristic of an efficient market
expected that prices adjust quickly and accurately to new info
what is the efficient market hypothesis?
a financial theory that suggests that financial markets are generally efficient in incorporating and reflecting all available information into asset prices
weak form efficiency
This form of the hypothesis asserts that all past trading information is already reflected in stock prices
semi-strong form efficiency
This form posits that all publicly available information is already reflected in stock prices
strong from efficiency
The strongest form of the hypothesis asserts that all information, whether public or private, is fully reflected in stock prices
random walk theory
The Efficient Market Hypothesis is often associated with the idea of a “random walk” in stock prices, meaning that future price movements are unpredictable and not influenced by past price movements
Active vs. Passive Investing
The hypothesis has implications for the debate between active and passive investment strategies. If markets are highly efficient, it becomes challenging for active fund managers to consistently beat the market, leading some investors to prefer passive strategies like index investing
Market Anomalies
Critics of the Efficient Market Hypothesis point to various market anomalies and behavioural patterns that seem to deviate from the hypothesis. For example, some argue that certain market trends or anomalies persist over time, suggesting that markets may not be perfectly efficient
If the efficient-market hypothesis is true, the average pension fund manager might as well select a portfolio with a pin
The efficient market hypothesis implies that investment in stocks should be done with thought and logic. By diversifying the portfolio, taking advantage of tax pension laws, and tailoring the portfolio to the client
what is a future contract
a financial agreement between two parties to buy or sell an asset at a predetermined future date for a price agreed upon in the moment
a future contract has no credit risk because:
it is collateralized daily
what does collateralization in terms of future contracts
checking and adjusting every day and making sure there’s enough money set aside, helps prevent the risk of one person not being able to keep their promise
what are mutual/active funds?
portfolios managed by pros that charge a percent of capital per year (usually around 0.9%)
what are passive funds?
portfolios invested into the financial markets like the S&P500, Ftse100/250 that charge a lower price (usually around 0.01%), with likely lower returns
options are a form of
derivatives
call option
buying a stock at a predetermined price
