CFA 47: Market Efficiency Flashcards
active returns
The Concept of Market Efficiency
Returns earned by strategies that do not assume that all information is fully reflected in market prices.
informationally efficient market
The Concept of Market Efficiency
Market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information.
passive investment
The Concept of Market Efficiency
Buying andholding a broad market portfolio that does not seek superior risk-adjusted returns.
active investment
The Concept of Market Efficiency
An approach to investing in which the investor seeks to outperform a given benchmark.
market value
The Concept of Market Efficiency
The price at which an asset can currently be bought or sold.
intrinsic value (fundamental value) The Concept of Market Efficiency
The value that would be placed on it by investors if they had a complete understanding of the asset’s investment characteristics.
arbitrage
The Concept of Market Efficiency
A set of transactions that produce riskless profits. Arbitrageurs are traders who engage in such trades to benefit from pricing discrepancies (inefficiencies) in markets. Such trading activity contributes to market efficiency.
short selling
The Concept of Market Efficiency
The transaction whereby an investor sells shares that he or she does not own by borrowing them from a broker and agreeing to replace them at a future date. The idea is to buy them at a lower price.
weak-form efficient market hypothesis
Forms of Market Efficiency
Security prices fully reflect all past market data, which refers to all historical price and trading volume information. If markets are weak-form efficient, past trading data are already reflected in current prices and invesotrs cannot predict future price changes by extrapolating prices or patterns of prices from the past.
technical analysis
Forms of Market Efficiency
The analysis of historical trading information (primarily pricing and volume data) in an attempt to identify recurring patterns in the trading data that can be used to guide investment decisions.
The Event Study Process
Forms of Market Efficiency
1) Identify the period of study
2) Identify the stocks associated with the event within the study period
3) Estimate the expected return for each company for the announcement date
4) Calculate the excess return for each company in the sample as the actual return on the announcement date, less the expected return
5) Perform statistical analyses on the excess returns in the sample to see whether these returns are different from zero
strong-form efficient market
Forms of Market Efficiency
Security prices fully reflect both public and private information. A market that is strong-form efficient is, by definition, also sam-strong and weak-form efficient. The test is if abnormal profit can be earned by nonpublic information, which it can.
fundamental analysis
Forms of Market Efficiency
The examination of publicly available information and the formulation of forecasts to estimate the intrinsic value of assets. Fundamental analysis involves the estimation of an asset’s value using company data, such as earnings and sales forecasts, and risk estimates as well as industry and economic data, such as economic growth, inflation, and interest rates. Buy and sell decisions depend on whether the current mraket price is less than or greater than the estimated intrinsic value.
market anomaly
Market Pricing Anomalies
Occurs if a change in the price of an asset or security cannot directly be linked to current relevant information known in the market or to the release of new information into the market.
data mining
Market Pricing Anomalies
Data is often examined with the intent to develop a hypothesis, instead of developing a hypothesis first. This is done by analyzing data in various manners, and even utilizing different empirical approaches until you find support for a desired result, in this case a profitable anomaly. A past anomaly does not indicate it will hold for the future.
