IPT 1 Chapter 11

Question 1

What is the evidence of stock market inefficiency?

Answer 1

If stock price movements are predictable

Question 2

What is the Efficient Market Hypothesis (EMH)?

Answer 2

In an efficient market, all available information is right away price, so prices reflect all available information and assets are priced correctly

Question 3

What is the result of the EMH?

Answer 3

1. No consist way to outperform the market
2. Past stock price performance is uninformative about future performance

Question 4

What is a random walk?

Answer 4

Stock price changes are random and unpredictable

Question 5

What are the three different types of EMH?

Answer 5

1. Weak form
2. Semi-strong form
3. Strong-form

Question 6

What is the weak form hypothesis?

Answer 6

Prices reflect all information that can be derived by examining market trading data, such as past prices

Question 7

What is the semi-strong hypothesis?

Answer 7

All publicly available information that relates to a firms future is reflected in the stock priceSton

Question 8

What is the strong-form hypothesis?

Answer 8

All public and private information is reflected in the stock price

Question 9

What are the common components of technical analysis?

Answer 9

Resistance levels and support levels

Question 10

What does the weak-form EMH finds about technical analysis?

Answer 10

IT argues that it is a fruitless activity

Question 11

What is fundamental analysis?

Answer 11

Analyzing balance sheet data, industry data, future interest rates, growth expectations in the hope of attaining insight into the future performance

Question 12

What does EMH find a wasted effort of strategy?

Answer 12

It suggest that active management strategy is a wasted effect

Question 13

What is active portfolio management?

Answer 13

Extensive search for misprices securities

Question 14

What does EMH advocate for?

Answer 14

Passive investment strategy

Question 15

What is passive investment strategy?

Answer 15

Buy and hold approach

Question 16

What are the Rationales for active portfolio manegemtn?

Answer 16

1. Rebalancing
2. Creating exposure
3. Servicing

Question 17

What does EMH say about profits?

Answer 17

There are no risk-free profits into asset markets, from business risk you can make risk-adjusted profits

Question 18

What is event studies?

Answer 18

Describes a technique of empirical financial research that enables to assess impact of a particular event on a stock price

Question 19

How do we do an event study?

Answer 19

1. Which asset pricing model to use
2. Which method to cumulate returns

Question 20

What are the two empirical predictions of EMH?

Answer 20

1. No investor can persistently beat the market
2. Prices should jump upon announcement of some new information and no price drift after announcement

Question 21

What are the four issues with testing the EMH?

Answer 21

1. Join hypothesis test
2. Magnitude test
3. Selection bias issue
4. The lucky event issue

Question 22

What is the criticism about the indirect evidence that professional investors can barely beat the market?

Answer 22

1. No correct comparison
2. Pros pick riskier stock
3. Long-term performance
4. Fees

Question 23

What are the different types of efficient market anomalies?

Answer 23

1. The small-firm effect
2. The neglected-firm effect
3. Value vs Growth
4. Short-term Momentum and Long-term Reversal effect
5. Post-earnings announcement drift

Question 24

What is the joint hypothesis test?

Answer 24

Any EMH test is thus a joint test of validity of EMH and the validity of the used asset pricing model

Question 25

What is the Magnitude issue?

Answer 25

Stock prices are close to fair vlaues, to only large portfolios can earn enough profits for minor mispricing

Question 26

What is the selection bias issue?

Answer 26

Keep it a secret if it found a reliably way to identify alphas

Question 27

What is the lucky event bias?

Answer 27

By luck someone will reach the top and become a stock market guru