Chapter 11 EMH

Question 1

random walk

Answer 1

Describes the notion that stock price changes are random and unpredictable.

Question 2

efficient market hypothesis
(EMH)

Answer 2

The prices of securities fully reflect available information. Investors buying securities in an efficient market should expect to obtain an equilibrium rate of return. Weak-form EMH asserts that stock prices reflect all information contained in the history of
past prices. The semistrong-form hypothesis asserts that stock prices also reflect all publicly available information. The strong-form hypothesis asserts that stock prices reflect all relevant information, including insider information.

Question 3

weak-form EMH

Answer 3

Weak-form EMH asserts that stock prices reflect all information contained in the history of
past prices

Question 4

semistrong-form EMH

Answer 4

The semistrong-form hypothesis asserts that stock prices also reflect all publicly available information.

Question 5

strong-form EMH

Answer 5

The strong-form hypothesis asserts that stock prices reflect all relevant information, including insider information.

Question 6

technical analysis

Answer 6

Research to identify mispriced securi- ties that focuses on recurrent and predictable stock price pat- terns and on proxies for buy or sell pressure in the market.

Question 7

resistance levels

Answer 7

A price level above which it is supposedly difficult for a stock or stock index to rise.

Question 8

support levels

Answer 8

A price level below which it is supposedly difficult for a stock or stock index to fall.

Question 9

fundamental analysis

Answer 9

Assessment of firm value that focuses on earnings and dividends prospects, expectations for future interest rates, and risk evaluation.

Question 10

passive investment strategy

Answer 10

Investing in a diversified portfolio or market index without attempting to search out mispriced securities.

Question 11

index fund

Answer 11

A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.

Question 12

event study

Answer 12

Research methodology designed to measure the impact of an event of interest on stock returns.

Question 13

abnormal return

Answer 13

Return on a stock beyond what would be predicted by market movements alone.

Question 14

cumulative abnormal return
(CAR)

Answer 14

Cumulative abnormal return (CAR) is the total abnormal return for the period surrounding an announcement or the release of information.

Question 15

momentum effect

Answer 15

The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Question 16

reversal effect

Answer 16

The tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in following periods.

Question 17

anomalies

Answer 17

Patterns of returns that seem to contradict the efficient market hypothesis.

Question 18

P/E effect

Answer 18

That low P/E stocks have exhibited higher aver- age risk-adjusted returns than high P/E stocks.

Question 19

small-firm effect

Answer 19

That investments in stocks of small firms
appear to have earned abnormal returns.

Question 20

neglected-firm effect

Answer 20

That investments in stock of less-well-known firms have generated abnormal returns.

Question 21

book-to-market effect

Answer 21

The tendency for stocks of firms with high ratios of book-to-market value to generate abnor- mal returns.