Chapter 6

Question 1

Arbitrage

Answer 1

Elimination of a riskless profit opportunity
in a market.

Question 2

Behavioural finance

Answer 2

The field of study that applies
concepts from other social sciences, such
as anthropology, sociology, and particularly
psychology, to understand the behavior of
securities prices.

Question 3

Bubbles

Answer 3

A situation in which the price of an asset differs from its fundamental market value. IT bubble

Question 4

Efficient market hypothesis

Answer 4

The hypothesis that
prices of securities in financial markets fully
reflect all available information.

Question 5

January effect

Answer 5

An abnormal rise in stock prices from
December to January.

Question 6

Market fundamentals

Answer 6

(items that have a direct
impact on future income streams of the securities)

Question 7

Mean reversion

Answer 7

The phenomenon that stocks with
low returns today tend to have high returns in
the future, and vice versa.

Question 8

Random walk

Answer 8

The movements of a variable whose
future changes cannot be predicted because,
given today’s value, the variable is just as likely to
fall as to rise.

Question 9

Short sales

Answer 9

: An arrangement with a broker to borrow
and sell securities. The borrowed securities are
replaced with securities purchased later. Short
sales let investors earn profits from falling securities prices.

Question 10

Theory of efficient capital markets

Answer 10

The theory that
prices of securities in financial markets fully
reflect all available information