Market Efficiency Flashcards
What is “Active Return”?
The return on a portfolio minus the return on the portfolio’s benchmark.
What is a “Passive Investment”?
A buy-and-hold approach in which an investor does not make portfolio changes based on short-term expectations of changing market or security performance.
What is “Active Investment”?
An approach to investing in which the investor seeks to outperform a given benchmark.
What is “Market Value”?
The price at which an asset or security can currently be bought or sold in an open market.
What is “Intrinsic Value”?
The amount gained (per unit) by an option buyer if an option is exercised at any given point in time.
May be referred to as the “Exercise Value” of an option.
What is “ARBITRAGE”?
1) The simultaneous purchase of an undervalue asset and sale of an overvalued but equivalent asset, in order to take advantage of a riskless profit on the price differential.
2) The condition in a financial market in which equivalent assets or combinations of assets sell for two different prices.
3) A risk-free option that earns an expected positive net benefit but requires no net investment of money.
What are “Abnormal Returns”?
The amount by which a security’s actual return differs from its expected return, given the security’s risk and them market’s return.
What is the “Weak-form efficient market” hypothesis?
The belief that security prices fully reflect all past market data.
What is a “Semi-Strong Form Efficient Market”?
A market in which security prices reflect all publicly and known available information.
What is “Technical Analysis”?
A form of security analysis that uses price and volume data, often displayed graphically, in decision making.
What is a “Strong-Form Efficient Market”?
A market in which security prices reflect all public and private information.
What is a “Market Anomaly”?
A change in the price or return of a security that cannot be directly linked to current relevant information known in the market or to the release of new information into the market.
What is the “January Effect”?
A calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months in the year.
Also called the “Turn of Year” effect.
What is an “Earnings Surprise”?
The portion of a company’s earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.
What is “Behavioral Finance”?
A field of finance that examines the psychological variables that affect and often distort investment decision-making of investors, analysts, and portfolio managers.
