MM34 Exam Group 1&2

Question 1

-is when the actual result under a given set of assumptions is different from the expected result predicted by a model.

-provides evidence that a given assumption or model does not hold up in practice. The model can either be a relatively new or older model.

Answer 1

ANOMALY

Question 2

Two common types of anomalies:

Answer 2

MARKET ANOMALIES
PRICING ANOMALIES

Question 3

are distortions in returns that contradict theefficient market hypothesis(EMH).

Answer 3

MARKET ANOMALIES

Question 4

are when something—for example, a stock—is priced differently than how a model predicts it will be priced.

Answer 4

PRICING ANOMALIES

Question 5

Causes of anomalies in an efficient market

Answer 5

Mispricing
Limits to arbitrage
Unmeasured risk
Selection bias

Question 6

is the ratio of a firm’s asset price to its fundamental value, which is the present value of future cash flows under rational expectations.

Answer 6

MISPRICING

Question 7

is a theory in financial economics that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.

Answer 7

Limits to arbitrage

Question 8

In finance, risk factors are the building blocks of investing, that help explain the systematic returns in equity market, and the possibility of losing money in investments or business adventures.

Answer 8

Unmeasured risk

Question 9

is the bias introduced by the selection of individuals, groups, or data for analysis in such a way that proper randomization is not achieved, thereby failing to ensure that the sample obtained is representative of the population intended to be analyzed.[1] It is sometimes referred to as the selection effect. The phrase “selection bias” most often refers to the distortion of a statistical analysis, resulting from the method of collecting samples

Answer 9

Selection bias

Question 10

Several studies in markets across the world have yielded the following results. Stocks with below average price-to-earnings and market-to-book ratios have consistently outperformed growth stocks over a period of time. This is a contradiction of the semi-strong efficient market form as financial disclosures are used to beat the market consistently.

Answer 10

Value Effect

Question 11

One study observed that on a risk-adjusted basis small-cap equities out-performed large cap equities. This anomaly was not observed in further studies and was therefore disregarded.

Answer 11

Size Effect

Question 12

Other Anomalies

Answer 12

-Close-end investment fund
discounts
-Earning Surprise
-Initial Public Offerings
-Abnormal profits based on dividends

Question 13

issues a limited number of shares during one offering, thus fixing the market capitalization till a second offering is made. In theory these shares must trade at their net asset value or NAV.

Answer 13

Close-end investment fund
discounts

Question 14

Pricing anomalies studied in the context of adjustment of stock prices in relation to earnings announcement come under the purview of earning surprise.

Answer 14

Earnings Surprise

Question 15

Companies avail the services of investment banks in pricing and marketing of their shares in their first stock market foray. As the entrants are new, their selling prices are set low and tend to see an increase on the first day of trading.

Answer 15

Initial Public Offerings

Question 16

Market researchers state that equity returns are impacted by stock volatility, inflation, interest rates and dividend yields. This should indicate market inefficiency especially of weak form. This does not hold true though over a period of time. The relationship between stock prices and dividends has been found to vary from positive to negative from time to time.

Answer 16

Abnormal profits based on dividends

Question 17

Types of Market Anomalies

Answer 17

The small- firm effect
Price reversals
January effect
The momentum effect

Question 18

holds that smaller companies have a greater amount of growth opportunities than larger companies.

Answer 18

The small- firm effect

Question 19

is also referred to as the mean reversion effect and refers to the tendency of stocks that have performed well in the past to underperform in the future, and the tendency of stocks that have underperformed in the past to outperform in the future

Answer 19

The price reversals

Question 20

is a hypothesis that there is a seasonal anomaly in the financial market where securities’ prices increase in the month of January more than in any other month.

Answer 20

The january effect

Question 21

refers to the market anomaly where stocks that have had the greatest return continue to outperform those with weak returns.

Answer 21

The momentum effect

Question 22

Other type’s of Market anomalies

Answer 22

September Effect
Days of the Week Anomalies
Monday effect

Question 23

refers to historically weakstock market returns for the month of September. There is a statistical case for the September effect depending on the period analyzed,but much of the theory is anecdotal

Answer 23

September Effect

Question 24

is the type of anomalies that affect the stock returns to intimately tied to the day of the week.

Answer 24

Days of the Week Anomalies

Question 25

is a theory which states that returns on the stock market on Mondays will follow the prevailing trend from the previous Friday. Therefore, if the market was up on Friday, it should continue through the weekend and, come Monday, resume its rise. The Monday effect is also known as the "weekend effect."

Answer 25

Monday effect

Question 26

the branch of microeconomics that studies how information and information systems affect an economy and economic decisions. or also called, INFORMATION ECONOMICS

Answer 26

Economic of Information

Question 27

is the discipline of modeling the role of information in an economic system. Information is a strange good that is easy to create, difficult to validate, easy to share but difficult to unshare.

Answer 27

INFORMATION ECONOMICS

Question 28

is a fundamental economic force that plays a role in every economic decision. Many economic models make naive assumptions about information such as the assumption that all economic agents have perfect information.

Answer 28

Information

Question 29

14 Example of Information Economics

Answer 29

INFORMATION OF GOODS Knowledge Economy Risk & Uncertainty Unknown Unknowns Behavioral Economics Expectations Asymmetric Information Incentives Speculation Private Information Adverse Selection Search Costs Signalling Screening

Question 30

The value of information goods including data such as market data and knowledge such as a book.

Answer 30

INFORMATION OF GOODS

Question 31

A global economic shift towards jobs that produce knowledge outputs such as strategies, plans, designs, specifications, instructions, data and computer code.

Answer 31

Knowledge Economy

Question 32

Risk results from a lack of information about the future, also known as uncertainty.

Answer 32

Risk & Uncertainty

Question 33

Risk can be identified, estimated and managed but unknown unknowns will remain.

Answer 33

Unknown Unknowns

Question 34

Modeling how real people actually react to information

Answer 34

Behavioral Economics

Question 35

Expectations that influence economic behavior.

Answer 35

Expectations

Question 36

is when certain economic agents have an information advantage over others in a market.

Answer 36

Asymmetric Information

Question 37

The information that is used to award economic agents such as the executive management of a firm.

Answer 37

Incentives

Question 38

Economic agents who attempt to forecast the future to profit.

Answer 38

Speculation

Question 39

Information as a competitive advantage such as a trade secret or patent.

Answer 39

Private Information

Question 40

A situation where either the buyer or the seller have more information in a transaction.

Answer 40

Adverse Selection

Question 41

The difficulty in finding information to make economic decisions. Decreases in search costs, such as the introduction of the internet, can make an industry far more competitive as it allows people to more easily evaluate prices and quality.

Answer 41

Search Costs

Question 42

Firms often want to charge consumers different prices based on their willingness to pay but this information is difficult to determine. is the process of trying to differentiate between customers based on their price sensitivity.

Answer 42

Screening

Question 43

The communication of value in a market.

Answer 43

Signalling

Question 44

The importance and value of information within economics is huge. It eliminates risk and uncertainty, and it makes it possible to take better choices that will report higher yields. The less risk and uncertainty there is, the higher the utility will be valued.

Answer 44

Importance of economic of information

Question 45

occurs when one party in a transaction or competitive situation has more information than the other party.

Answer 45

Asymmetric Information

Question 46

Two Forms of Asymmetric Information

Answer 46

1. Adverse Selection 2. Moral Hazards

Question 47

occurs when buyers cannot detect product quality prior to purchase and use.

Answer 47

Adverse Selection

Question 48

It is the action or announcements conveying information about a firm’s intentions or abilities.

Answer 48

Signals

Question 49

occurs when the seller can change the quality of their offerings without detection by buyers prior to the purchase or trial.

Answer 49

Moral Hazards

Question 50

TYPES OF QUALITY SIGNALS

Answer 50

Default-Independent Signals Default-Contingent Signals

Question 51

the seller incurs the signal cost regardless of whether it fails to perform as promised

Answer 51

Default-Independent Signals

Question 52

the seller incurs the signal cost only when they fail to perform as promised

Answer 52

Default-Contingent Signals

Question 53

It is a promise made by the seller that the product, or its performance-related attributes, is free from defects in materials and workmanship.

Answer 53

WARRANTIES

Question 54

* Represents the value of the brand name to the buyers * Brand name reduces buyers’ search and information processing costs, and perceived risk. * To be credible, maintain consistent marketing and delivery of quality, * Advertising claims must be consistent with the actual quality delivered

Answer 54

Brand Equity

Question 55

A money-back guarantee promises to return the buyer’s purchase price if the product fails to satisfy the buyer during the period covered by the guarantee

Answer 55

GUARANTIES

Question 56

It occurs when sellers can change the quality of their offerings without buyers’ detection before purchase or trial.

Answer 56

Moral Hazards

Question 57

Buyer’s willingness to pay a price premium and their willingness and ability to punish the seller if quality is compromised, provide incentives to solve this moral hazard problem.

Answer 57

Price Premiums

Question 58

● Firms battle for the patronage of customers, try to take business from a rival, or seek to drive a competitor out of the market. ● When competition is gaining in these battles, price reductions occur leading to price wars

Answer 58

Price Wars