Efficient Markets

Question 1

what is the efficient market hypothesis

Answer 1

says that stock prices already reflect all available information

new information is unpredictable - if we could predict it, it would be part of tpday’s infomarion

so stock prices change in repsonse to new information

Question 2

assumption of efficient market hypothesis

Answer 2

markets adjust to include new information almost immediately

all investors interpret information the same way, they are all rational and risk averse

Question 3

the only way to outperform the market in the efficient market hypothesis is by what

Answer 3

luck

Question 4

examples of public info

Answer 4

accounts
media articles
analyst reports about company or industry

Question 5

example of private info

Answer 5

people working in the company know about info that has not yet been made public that could have an impact on the share price

Question 6

what is insider trading

Answer 6

trading on information that is not available to the public domain

Question 7

why are there strict rules on insider trading

Answer 7

to provide a level playing field

CEOs, families and friends could buy and sell their own shares then

Question 8

three types of available info

Answer 8

past
public
private

Question 9

is basing market prices on just past info efficient

Answer 9

no - weak

Question 10

is basing market prices on just past and public info efficient

Answer 10

semi strong

Question 11

is basing market prices past, public and private info efficient

Answer 11

strong

Question 12

why will we never have strong market efficiency

Answer 12

cannot trade on private information

Question 13

if you believe the market is efficient are you more likely to be a passive or active investor

Answer 13

passive

Question 14

what is fundamental analysis

Answer 14

pouring through accounts and looking at the industry and their competitors

trying to be ahead of the markt

using economic and accounting information to predict stock prices

Question 15

how to asses whether an asset is over or undervalued

Answer 15

DCF model

Compare to peers (eg Tesla)

Question 16

what is technical analysis

Answer 16

using prices and volume information to predict future price

depends on sluggish response of stock prices

Question 17

examples of passive investments

Answer 17

EFTs
Index Funds

Question 18

what is market vs intrinsic value

Answer 18

market value is the price at which an asset is currently being bought/sold

intrinsic value is the value that would be if investors had complete information

Question 19

what are some structural factors affecting market efficiency

Answer 19

• accounting standards and financial disclosures
• number of market participants
• limits to trading eg short selling
• transaction costs
  rime frame

Question 20

what does behavioural finance assume

Answer 20

investors have cognitive biases that may lead to irational decision making

they may under or over react to new infromatio

Question 21

what can herding cause

Answer 21

booms
busts

greed can be speculative

things become overvalued and not enough people stop to question the validity of the bubble eg tech prices

fear - when things go wrong there is a stampede to exit the market

Question 22

what is bounded rationality

Answer 22

rather than compltely optimising, humans don’t waste their time and energy and just make a decision with a good enough effort to be satisfied

Question 23

examples of cognitive biases

Answer 23

over confidence
over optimism
confirmation bias
anchoring bias

Question 24

what is confirmation bias

Answer 24

echo chamber

finding data that confirms what you already believe

Question 25

what is anchoring bias

Answer 25

relying too heavily on the first piece of information given on a ropic

Question 26

what is frame dependene

Answer 26

the tendency of individuals to make different decisions depending on how a question is framed

Question 27

what is loss aversion

Answer 27

loss causes more pain than gains create pleasure

an assymetry

causes asymmetrical behaviour

Question 28

what are heursitics

Answer 28

shortcut used to make decisions

stereotypes and limited examples

Question 29

what is hyperbolic disocunitng

Answer 29

favouring immediate rewards over rewards in the future

even if present value of future rewards is higher