Chapter 6 CAIA Flashcards
Informational Market Efficiency
Refers to the extent to which asset prices reflect available information. An informationally efficient market is a market in which assets are traded at prices that equal their values based on all available information. The concept of informational market efficiency is sometimes referred to as efficient market theory or the efficient market hypothesis.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 121). Wiley. Edición de Kindle.
Weak Form Informational Market Efficiency
refers to market prices reflecting available data on past prices and volumes. Weak form efficiency addresses the issue of whether technical analysis can be useful in earning consistent and superior risk-adjusted returns.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 122). Wiley. Edición de Kindle.
Semistrong Form Informational Market Efficiency
refers to market prices reflecting all publicly available information (including not only past prices and volumes but also any publicly available information such as financial statements and other underlying economic data). Semistrong form efficiency is designed to address the issue of whether technical analysis and, especially, fundamental analysis can be useful in earning consistent and superior risk-adjusted returns.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 122). Wiley. Edición de Kindle.
Strong Form Informational Market Efficiency
Refers to market prices reflecting all publicly and privately available information. Strong form efficiency is designed to address the issue of whether any attempts to earn consistent and superior risk-adjusted returns can be successful, including insider trading.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 122). Wiley. Edición de Kindle.
The Six Factors Driving Informational Market Efficiency
The greater the value of the assets being traded, the greater the competition for potential profits and losses from mispricing, within limits.
Greater trading frequency for the assets increases competition by providing greater incentives for investors, speculators, and arbitrageurs to analyze information and attempt to make favorable trades.
Low levels of trading frictions facilitate higher competition by encouraging arbitrage and speculation with the lowering of total trading costs.
Fewer regulatory constraints on trading also tend to lead to improved informational market efficiency by expanding competition and trading.
Assets will also tend to trade at prices closer to their informationally efficient values when there is easier access to better information, as better information facilitates better financial analysis.
Assets will also tend to trade at prices closer to their informationally efficient values when there is less uncertainty about their valuation.
Asset Pricing Model
A framework for specifying the return or price of an asset based on its risk, as well as future cash flows and payoffs.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 124). Wiley. Edición de Kindle.
Capital Asset Pricing Model
A general equilibrium model, meaning that it prices all assets rather than simply describing one or more relative pricing relationships.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 125). Wiley. Edición de Kindle.
Single Factor Asset Pricing Model
A single-factor asset pricing model explains returns and systematic risk using a single risk factor.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 125). Wiley. Edición de Kindle.
Ex ante Models
Ex ante models, such as ex ante asset pricing models, explain expected relationships, such as expected returns. Ex ante means “from before.” Ex ante models provide an understanding of how return expectations or requirements are formed.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 126). Wiley. Edición de Kindle.
Systematc Return
Systematic return is the portion of an asset’s return driven by a common association.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 128). Wiley. Edición de Kindle.
Systematic Risk
Systematic risk is the dispersion in economic outcomes caused by variation in systematic return.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 128). Wiley. Edición de Kindle.
Idiosyncratic Returns
Idiosyncratic return is the portion of an asset’s return that is unique to an investment and not driven by a common association.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 128). Wiley. Edición de Kindle.
Idiosyncratic Risk
association. Idiosyncratic risk is the dispersion in economic outcomes caused by investment-specific effects.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 128). Wiley. Edición de Kindle.
Ex post Model
An ex post model describes realized returns and provides an understanding of risk and how it relates to the deviations of realized returns from expected returns.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 128). Wiley. Edición de Kindle.
Multi Factor Models
Multifactor models of asset pricing express systematic risk using multiple factors and are extremely popular throughout traditional and alternative investing.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 129). Wiley. Edición de Kindle.
