Foundations of Financial Economics Flashcards
List two major factors that drive informational market efficiency through facilitating better investment analysis.
Assets will tend to trade at prices closer to their informationally efficient values when there is easier access to better informations.
Assets will tend to trade at prices closer to their informationally efficient values when there is less uncertainty about their valuation. In other words, when there are better valuation methods.
What does the modified Fisher equation express regarding minimal interest rate determinants?
It expresses the nominal interest rate as the combination of the after-tax real interest rate, r, and the anticipated rate of inflation, with an adjustment for income tax.
What does it mean to bootstrap a yield curve?
It is the process of recursively estimating spot rates using one or more zero-coupon bonds on the short end and coupon bonds on the medium and long term regions of the term structure.
In which theory of the term structure of interest rates do all bonds have the same expected return?
Unbiased expectations theory
What differentiates a relative pricing model from an absolute pricing model?
A relative pricing model prescribes the relationship between two prices.
An absolute pricing model attempts to describe a value based on its underlying economic factors.
What makes a binomial tree a recombining tree?
A binomial tree with an upward movement followed by a downward movement that recombines with a pathway with a downward movement and an upward movement. Has n+1 possible outcomes for an n period tree, rather than 2 (power of n) outcomes
What is the term used to describe the framework for specifying the return or price of an asset based on its risk?
Asset pricing model
What is the market portfolio and what is the market weight?
Market portfolio is a hypothetical portfolio containing all tradable assets in the world.
Market weight of an asset is the proportion of the total value of that asset to the total value of all assets in the market portfolio.
What is an ex-post excess return?
The total return minus the riskless return.
