Midterm 2 (Last Deck)

Question 1

Market Anomalies

Answer 1

Techniques or strategies that appear to be contrary to an efficient market

Question 2

Data Mining

Answer 2

The search for apparent patterns in stock returns by intensively analyzing data

Question 3

Weak form market efficiency

Answer 3

All past-price information is fully reflected in stock prices. Implies that technical analysis is not useful.

Question 4

Semi-strong form market efficiency

Answer 4

All public information is fully reflected in stock prices. Implies that fundamental analysis is not useful.

Question 5

Strong form market efficiency

Answer 5

All information is reflected in stock prices. Implies that insider trading should not be profitable.

Question 6

Abnormal returns

Answer 6

The difference between the average actual return and the expected return.

Question 7

Bubble

Answer 7

An increase in the price of an asset above its fundamental value due to expectations of future increases and “irrational exuberance”

Question 8

Momentum

Answer 8

Stock price behavior reflecting positive serial correlation

Question 9

Mean Revision

Answer 9

Stock price behavior reflecting negative serial correlation

Question 10

Random Walk

Answer 10

Stock price behavior reflecting no serial correlation. The efficient market hypothesis implies that stock prices follow a random walk.

Question 11

In-Sample vs. Out-of-Sample

Answer 11

In-sample refers to the data used to determine the trading rule. Out-of-sample refers to the data used to test the trading rule after it has been determined.

Question 12

Back-testing

Answer 12

Evaluating a trading rule by seeing how it performed when applied to historical data.