IPT 1 Chapter 11 Flashcards
What is the evidence of stock market inefficiency?
If stock price movements are predictable
What is the Efficient Market Hypothesis (EMH)?
In an efficient market, all available information is right away price, so prices reflect all available information and assets are priced correctly
What is the result of the EMH?
- No consist way to outperform the market
- Past stock price performance is uninformative about future performance
What is a random walk?
Stock price changes are random and unpredictable
What are the three different types of EMH?
- Weak form
- Semi-strong form
- Strong-form
What is the weak form hypothesis?
Prices reflect all information that can be derived by examining market trading data, such as past prices
What is the semi-strong hypothesis?
All publicly available information that relates to a firms future is reflected in the stock priceSton
What is the strong-form hypothesis?
All public and private information is reflected in the stock price
What are the common components of technical analysis?
Resistance levels and support levels
What does the weak-form EMH finds about technical analysis?
IT argues that it is a fruitless activity
What is fundamental analysis?
Analyzing balance sheet data, industry data, future interest rates, growth expectations in the hope of attaining insight into the future performance
What does EMH find a wasted effort of strategy?
It suggest that active management strategy is a wasted effect
What is active portfolio management?
Extensive search for misprices securities
What does EMH advocate for?
Passive investment strategy
What is passive investment strategy?
Buy and hold approach
What are the Rationales for active portfolio manegemtn?
- Rebalancing
- Creating exposure
- Servicing
What does EMH say about profits?
There are no risk-free profits into asset markets, from business risk you can make risk-adjusted profits
What is event studies?
Describes a technique of empirical financial research that enables to assess impact of a particular event on a stock price
How do we do an event study?
- Which asset pricing model to use
- Which method to cumulate returns
What are the two empirical predictions of EMH?
- No investor can persistently beat the market
- Prices should jump upon announcement of some new information and no price drift after announcement
What are the four issues with testing the EMH?
- Join hypothesis test
- Magnitude test
- Selection bias issue
- The lucky event issue
What is the criticism about the indirect evidence that professional investors can barely beat the market?
- No correct comparison
- Pros pick riskier stock
- Long-term performance
- Fees
What are the different types of efficient market anomalies?
- The small-firm effect
- The neglected-firm effect
- Value vs Growth
- Short-term Momentum and Long-term Reversal effect
- Post-earnings announcement drift
What is the joint hypothesis test?
Any EMH test is thus a joint test of validity of EMH and the validity of the used asset pricing model
What is the Magnitude issue?
Stock prices are close to fair vlaues, to only large portfolios can earn enough profits for minor mispricing
What is the selection bias issue?
Keep it a secret if it found a reliably way to identify alphas
What is the lucky event bias?
By luck someone will reach the top and become a stock market guru
