Lecture 2-Momentum and contrarian

Question 1

What is a contrarian investor?

Answer 1

-investors buy stocks that have performed poorly and sell stock that have performed well

Question 2

What is a momentum investor?

Answer 2

investors buy stocks that are rising in value with the anticipation of earnings acceleration

Question 3

3 types of market efficiency

Answer 3

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Question 4

Key empirical evidence of momentum by Jegadeesh anf Titman (1993)

Answer 4

• Examine returns to trading strategies using firm-specific lagged returns (3, 6, 9, and 12 month holding period returns).
• Evidence of price momentum over 3 to 12 month periods
• Average gain of 1% per month hence a momentum stratergy
• Buy winners and sell losers

Question 5

Interpretation of findings by Jegadeesh & Titman (1993)

Answer 5

This short-term reversal is followed by intermediate term inertia as winner stocks deliver several months of relatively poor performance, followed again by reversion to the average

-Therefore only effective in the short

Question 6

Evidence by D Bondt & Thaler (1984) of Contrarianism

Answer 6

From 1926 to 1982, “loser” portfolios outperformed the market by 19.6% after 36 months while “winner” portfolios earned 5% less than market

Earn 25% mostly on the purchase of Loser, buys loser sell winners

Question 7

Conrad & Kaul (1998) Evidence to support

Answer 7

Test 120 momentum and contrarian trading strategies and find that most do not yield positive profits

However, they do find that momentum strategies at the 3-12 month horizon are generally able to yield statistically significant profits