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Actuarial Economics > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is the Efficient Markets Hypothesis (EMH)?

A

The price of every security fully reflects all available information and hence will equal its ‘true’ investment value.

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2
Q

Who is considered the father of Value Investing?

A

Benjamin Graham

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3
Q

What does the Strong Form EMH state?

A

Market prices of a security reflect all information both public and non-public.

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4
Q

What does the Semi-Strong Form EMH state?

A

Market price of any security reflects all publicly available information.

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5
Q

What does the Weak Form EMH state?

A

Market price of a security reflects all information contained in the historical price data of that security.

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6
Q

What is Alpha in investment terms?

A

Returns above the average return that is commensurate with the level of risk posed by a security class.

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7
Q

What does the Efficient Market Hypothesis imply about active management?

A

Investors will not be able to sustainably generate excess risk-adjusted returns (Alpha).

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8
Q

What is the consequence of an efficient security market?

A

The price of every security fully reflects all available information.

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9
Q

What is the main argument against EMH?

A

There are anomalies in the market that can be exploited for profit.

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10
Q

What is Technical Analysis?

A

The use of historical technical data of a security (e.g., price, trading volume) to identify patterns that can be used to spot mispricings.

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11
Q

What is Fundamental Analysis?

A

The use of information concerning the issuer of a security and general economic conditions to determine the ‘true’ value of a security.

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12
Q

What does EMH suggest about passive management?

A

Passive management aims to hold the market in line with market capitalization makeup.

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13
Q

Fill in the blank: The Great Depression was marked by the Stock ________ Market Crash (1929).

A

Black Monday

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14
Q

What event led to 25% unemployment in the US?

A

The Great Depression

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15
Q

Who published ‘Efficient Capital Markets - A Review of Theory & Empirical Work’ in 1970?

A

Eugene Fama

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16
Q

What are the implications of the Strong Form EMH on insider trading?

A

Insider trading regulation would not be necessary in a strong form market.

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17
Q

What are common market folklore sayings?

A
  • Buy low, sell high
  • Don’t put all your eggs in one basket
  • Sell in May and go away.
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18
Q

What is a challenge for testing the EMH?

A

Difficulties in defining efficiency and measuring risk.

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19
Q

True or False: According to EMH, technical and fundamental analysis can create sustainable excess risk-adjusted returns.

A

False

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20
Q

What is the role of the FDIC?

A

To insure bank deposits.

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21
Q

What do anomalies in the market suggest about EMH?

A

Anomalies can throw out mispricings even in an efficient market.

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22
Q

What is the significance of the Smoot-Hawley Trade Tariffs (1930)?

A

They contributed to the economic downturn during the Great Depression.

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23
Q

What does the term ‘mean reversion’ refer to in the context of EMH?

A

The tendency of asset prices to return to their historical average over time.

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24
Q

What is the primary focus of behavioral finance?

A

To examine mental biases and decision-making errors affecting financial decisions.

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25
What is the main objective of testing EMH?
To determine the validity of the efficiency of markets.
26
What is the role of the Security Exchange Commission (SEC)?
To regulate and oversee the securities markets.
27
What is the relationship between excessive volatility and EMH?
Excessive volatility is not justified by new information, which challenges market rationality.
28
What is the significance of the term 'overreaction' in the context of EMH?
It refers to the market's tendency to respond too strongly to new information.
29
30
What does EMH stand for?
Efficient Market Hypothesis
31
True or False: The EMH states that stock prices reflect all available information.
True
32
What are the three forms of EMH?
Weak form, Semi-strong form, Strong form
33
Fill in the blank: The ______ form of EMH asserts that all past market prices and data are reflected in stock prices.
Weak
34
Which form of EMH incorporates all publicly available information?
Semi-strong form
35
True or False: The strong form of EMH asserts that all insider information is also reflected in stock prices.
True
36
What is a key argument in favor of the weak form of EMH?
Technical analysis cannot consistently achieve excess returns.
37
What is a common criticism of the semi-strong form of EMH?
It does not account for market anomalies and behavioral biases.
38
Fill in the blank: Critics argue that EMH fails to explain ______ events in the stock market.
Market bubbles
39
What type of investor is most likely to benefit from the strong form of EMH?
None, as it suggests that even insider information is already priced in.
40
True or False: Behavioral finance suggests that investors are always rational and make decisions based solely on available information.
False
41
What is an example of an anomaly that challenges the EMH?
The January effect
42
Which form of EMH would argue that fundamental analysis is ineffective?
Semi-strong form
43
Fill in the blank: The ______ form of EMH is based on the idea that all information, both public and private, is reflected in stock prices.
Strong
44
What is a major implication of the weak form of EMH for technical analysts?
Their strategies are unlikely to yield consistent profits.
45
True or False: The existence of mutual funds that consistently outperform the market supports the EMH.
False
46
What does the term 'market efficiency' refer to?
The extent to which stock prices reflect all available information.
47
What is one argument against the strong form of EMH?
Insider trading can lead to abnormal profits.
48
What does the efficient market hypothesis suggest about stock price predictability?
Stock prices are unpredictable and follow a random walk.
49
Fill in the blank: The ______ form of EMH suggests that past price movements are not useful for predicting future prices.
Weak
50
Which financial model is often cited as evidence against the EMH?
The Capital Asset Pricing Model (CAPM)
51
True or False: Proponents of EMH believe that markets are perfectly efficient at all times.
False
52
What is a behavioral finance concept that challenges the EMH?
Herd behavior
53
Fill in the blank: The semi-strong form of EMH suggests that ______ public information is already reflected in stock prices.
All
54
What is the implication of EMH for active portfolio management?
It suggests that active management will not outperform passive management consistently.
55
True or False: EMH supports the idea that investors can achieve above-average returns consistently.
False
56
What is a limitation of the weak form of EMH?
It does not consider fundamental analysis.
57
Fill in the blank: An argument in favor of the semi-strong form of EMH is that ______ announcements are quickly reflected in stock prices.
Earnings
58
What is a common method used to test the weak form of EMH?
Serial correlation tests
59
Fill in the blank: The ______ form of EMH is often criticized for its assumptions about investor behavior.
Strong
60
What does empirical evidence suggest about the validity of the EMH?
There are instances where markets appear inefficient.
61
True or False: The EMH implies that all investors have the same information at the same time.
True
62
What is the impact of market psychology on the EMH?
It suggests that psychological factors can lead to market inefficiencies.
63
Fill in the blank: The existence of ______ funds that consistently outperform the market challenges the EMH.
Hedge
64
What is a potential outcome of market inefficiencies?
Opportunities for arbitrage.

Actuarial Economics (6 decks)

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