Chapter Nine Terms Flashcards
Random Walk Hypothesis
Predicting stock price movements is very difficult because new information is unpredictable
Efficient Market
Market that rapidly and fully incorporates all new information
Efficient Markets Hypothesis (EMH)
Stock prices rapidly incorporate new information, making it difficult for investors to earn abnormally high returns by identifying undervalued stocks
Abnormal Return (Alpha)
Difference between an investment’s actual return and its expected return
Weak Form of the EMH
Stock prices fully reflect any relevant information that can be obtained from the analysis of past price movements
Semi-Strong Form of the EMH
Stock prices fully reflect all relevant information that investors can obtain from any public source
Strong Form of the EMH
Stock market can rapidly incorporate new information even if it is not disseminated through public sources
Arbitrage
Transaction in which an investor simultaneously buys and sells the same asset at different prices to earn an instant, risk-free profit
Market Anomalies
Market patterns that are inconsistent with EMH, meaning there is less evidence contradicting EMH then supporting it
Behavioural Finance
The assumption that investors, managers, and other actors in financial markets are rational, behavioural finance posits and market mistakes are linked to cognitive biases
Overconfidence
People putting too much faith in their own ability to perform complex tasks
Self-Attribution Bias
When something good happens, individuals attribute that outcome to actions that they have taken, but when something bad happens, they attribute it to bad luck
Loss Aversion
People feel the pain of loss more acutely than the pleasure of gain
Representativeness
Cognitive biases that occur because people have difficulty thinking about randomness in outcomes
Narrow Framing
People tend to analyze a situation in isolation, while ignoring the larger context
