Market Efficiency

Question 1

Description of Efficient Markets

Answer 1

• informationally efficient market
• only unexpected information should move prices
• in a perfectly efficient market investors should use a passive investment strategy
• market value = intrinsic value

Question 2

Forms of Market Efficiency

Answer 2

Weak form
Semi-strong form
Strong form

Question 3

Weak Form

Answer 3

Market prices reflect:
Past Market Data. Public info. Private info
Yes No No

Technical analysis cannot make abnormal returns on a consistent basis simply by analyzing historical market info

Question 4

Semi-Strong Form

Answer 4

Market prices reflect:
Past Market Data. Public info. Private info
Yes Yes No

• prices adjust quickly and accurately to new public info
• efforts to analyze publicly available info is futile
• fundamental analysis will not lead to abnormal returns in the long run.

EMs may not be semi-strong form efficient

Question 5

Strong Form

Answer 5

Market prices reflect:
Past Market Data. Public info. Private info
Yes Yes Yes

• investors will not be able to earn abnormal profits by trading on private info
• markets are not strong-form efficient as regulations prohibit the use of private info (insider trading)

Question 6

Securities markets are NOT _____ form efficient

Answer 6

are not strong form efficient

Question 7

If markets are semi-strong form efficient, active portfolio managers cannot outperform the market on a consistent basis, therefore

Answer 7

investors should invest passively

Question 8

Time-series Anomalies

Answer 8

• calendar anomalies

- momentum and overreaction anomalies

Question 9

Cross-sectional anomalies

Answer 9

• size effect: small-cap tend to perform better than large-cap
• value effect: value stocks tend to perform better than growth stocks

Question 10

Behavioral Finance

Answer 10

• uses human psychology to explain investment decisions

Question 11

Loss aversion

Answer 11

• investors dislike losses more than they like gains of the same amount

Question 12

Herding

Answer 12

• WSB

- information cascades: people following 13Fs

Question 13

Overconfidence

Answer 13

• investors place too much confidence in their ability to process and analyze information and thus value a security

Question 14

Mental accounting

Answer 14

investors divide investments into separate mental accounts, do not view them as a total portfolio

Question 15

Narrow framing

Answer 15

• investors focus on issues in isolation

Question 16

Conservatism

Answer 16

• investors tend to be slow to react to changes

Question 17

Gamblers fallacy

Answer 17

• on a hot streak, it’ll keep going

Question 18

Disposition effect

Answer 18

• slow to realize losses, fast to realize gains