CH 8 Flashcards
Define the ‘efficient market Hypothesis (EMH)’.
The hypothesis that prices of securities fully reflect available information about securities.
Define ‘weak-form EMH’.
The assertion that stock prices already reflect all information contained in the history of past trading.
Define ‘semistrong-form EMH’.
The assertion that stock prices already reflect all publicly available information.
Define ‘strong-form EMH’.
The assertion that stock prices reflect all relevant information, including inside information.
Define ‘technical analysis’.
Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.
What is the key to success for ‘technical analysis’?
The key to successfully technical analysis is a sluggish response of stock prices to fundamental supply-and-demand factors.
This would allow analysts to identify a trend that can be exploited during the adjustment period.
Define the ‘resistance level’.
A price level above which it is supposedly unlikely for a stock or stock index to rise.
Define ‘support level’.
A price level below which it is supposedly unlikely for a stock or stock index to fall.
Define ‘fundamental analysis’.
Research on the determinants of stock value, such as earnings and dividend prospects, expectations for future interest rate, and risk of the firm.
Define ‘passive investment strategy’.
Buying a well-diversified portfolio without attempting to search out mis-priced securities.
Define ‘index fund’.
A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.
Why might high tax bracket investors have a preference for capital gains over interest income?
Due to the fact that capital gains are taxed less heavily than interest income and with capital gains they have the option to defer the realization of capital gains income.
NOTE:
Higher tax brackets can be avoided by deferring capital gains income. Thus benefiting from a lower tax rate.
Define the ‘momentum effect’.
The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.
Define the ‘reversal effect’.
The tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period.
Describe the ‘P/E effect’.
Portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.
