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Advanced Finance > Lecture 7 > Flashcards

Lecture 7 Flashcards

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1
Q

Efficient market hypothesis states

A

Any information that could be used to predict the stock performance should already be reflected in the stock price

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2
Q

Increases/ decreases in stock prices due to

A

New information (unpredictable)

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3
Q

Random walk

A

Stock price changes should be random and unpredictable

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4
Q

If stock prices are predictable

A

Stock markets are inefficient

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5
Q

Weak form EMH

A

Stock prices reflect all past information that can be derived by examining market trading data

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6
Q

Trend analysis in weak form EMH

A

Pointless > any relevant information regarding the future performance will already be reflected

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7
Q

Semi-strong EMH

A

All publicly available information regarding the prospects of a firm must be reflected in the stock price

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8
Q

Strong form EMH

A

Stock prices reflect all information relevant to the firm, even if only available to insiders

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9
Q

Technical analysis =

A

Search for recurrent and predictable patterns in stock prices

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10
Q

Fundamental analysis =

A

Uses earnings and dividend prospects, expectations of future interest rates and risk evaluation to determine proper stock prices

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11
Q

If the present discounted value of payments stockholder received exceeds stock price

A

Purchase stock

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12
Q

EMH predicts that the majority of fundamental analysis is

A

Doomed to fail > if analysts use the same publicly available info, little different between their analysis

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13
Q

Investor’s trick =

A

To find firms that are better than other’s estimate/ not as bad as the stock price suggests

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14
Q

Mututal funds benefit from

A

Economies of scale

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15
Q

Active management according to EMH

A

Largely wasted effort

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16
Q

EMH advocates

A

The passive investment strategy > because stock prices are at fair levels, makes no sense to buy and sell frequently and incur large brokerage fees

17
Q

Index funds

A

Designed to replicate the performance of a broad based index of stocks

18
Q

Firm specific risk can be eliminated through

A

Diversification

19
Q

Tax considerations (3)

A
  • Tax brackets of investors impacts their preference
  • Capital gains are taxed less heavily than dividends
  • Investment opportunities can be sensitive to tax benefits eg real estate
20
Q

Role of portfolio manager in efficient market =

A

To tailor portfolio to investors’ needs instead of beating the market

21
Q

Deviations from efficiency may

A

Offer profit opportunity for better informed traders

22
Q

Disadvantage of deviations from efficiency

A

Can result in large costs > inefficient resource allocation

23
Q

If inefficient capital markets (2)

A
  • Investment opportunities may be foregone

- Overpriced securities may be able to obtain capital too cheaply

24
Q

Event studies =

A

Assess the impact of an event on the firm’s stock price using empirical financial research

25
Q

Can measure the impact of an event by

A

Estimating the abnormal return of a stock at the moment the information about the event becomes known to the market

26
Q

Leakage information

A

Occurs when information regarding an event is released to a small group of investors before public release

27
Q

Leakage information skews

A

Abnormal returns on announcement date > therefore cumulative abnormal return better indicator

28
Q

Are markets efficient? > The magnitude issue

A

Against large fluctuations in the market, small increases in the performance can be hard to detect

29
Q

Are markets efficient? > The selection bias issue

A

Investors are unlikely to share successful techniques with others

30
Q

Are markets efficient? > the lucky event issue

A

Only tend to hear about the large wins, not the corresponding losses

31
Q

Weak-form tests (5)

A
  • Returns over the short horizon
  • Returns over the long horizon
  • Fama & French
  • Campbell & Shiller
  • Kiem & Stambaugh
32
Q

Fama & French

A

Aggregate returns are higher with higher dividend ratios

33
Q

Campbell & Shiller

A

Earnings yield can predict market returns

34
Q

Kiem & Stamburgh

A

Bond spreads can predict market returns

35
Q

Semi-strong tests (5)

A
  • PE effect
  • Small firm effect
  • Neglected firm effect
  • Book-to-market ratios
  • Post-earnings announcement price drift
36
Q

Strong form tests (2)

A
  • Insider trading studies by Jaffe

- SEC requires all insiders to register trading activity

Advanced Finance (20 decks)

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