Chapter 7 Flashcards
What is CAPM?
Capital asset pricing model
How can we explain CAPM?
Single factor model that characterises the portion of an asset’s total return that results from systematic movements in the broader market
How do we calculate CAPM?
rs = rRF + betas x (rM - rRF)
What is rS?
Total return on the assets(stock) of interest
What is rRF?
Risk-free rate of return available to investors
What is rM?
Total return on a well-diversified portfolio of stocks
What is the market/equity risk premium?
rM - rRF
What is alpha in a regression?
The y-intercept
What are the implications of efficiency?
If markets are not informationally efficient:
- conduct own research
- active strategies should outperform passive strategies if mispriced securities can be identified
Why are there random price changes?
Market moves randomly
What is a cup in handle?
When the price goes up, then falls a little, increases and falls -> cycle
The lowest point is the resistance
What is a death cross?
When the 50-day average pushes the prices drop fast
What is a golden cross?
When the 50-day average pushes prices up
What is fundamental analysis?
Using economic and accounting info to predict stock price changes
What is active management?
Trying to beat the market
What is passive management?
Accepting what the market has to offer and making the best of it
