Pre Ch. 6 Flashcards
σ ?
Standard Deviation or Sigma
HPR & HPRR
Holding Period Return
HPR = income received + change in price / beg price
Holding Period Return Relative
HPRR = income received + ending price / Beg price
or
HPR + 1
Nasdaq 100
100 biggest non-financial companies
Good for comparing tech portfolios
Treynor Ratio
Known as “Reward to Volatility Ratio”
Tp = Rp - Rf / βp (higher the ratio the better) where: βp = beta coefficient Rp = actual return Rf = risk free rate
Information Ratio
IR = (Rp - Rb) / σa (higher is better)
Rp = actual return Rb = return on benchmark σa = standard dev on the difference between your portfolio and the return on benchmark
Efficient Market Hypothesis
Weak Form
Semi-Strong Form
Strong Form
The theory that the market correctly prices securities in light of known, relevant information.
Weak form - current stock prices reflect all information based on trading data.
Semi-strong form - when new information is made public the next trade will be at a price that reflects that information.
Strong form - stock prices reflect all known and unknown information.
To test weak form market theory what 2 tests can be used?
Serial correlation coefficient
&
Filter rules
Sharpe Ratio
Sp = Rp - Rf / σp
Rp = actual return Rf = risk free rate σp = standard deviation
Higher the sharpe ratio the better
A measure of performance relative to risk taken
Sometimes known as “reward to volatility ratio”
The Beta for the market is always?
1
Beta is a measure of the volatility, or systematic risk, of a security or portfolio, in comparison to the market as a whole.
Jensen’s Alpha (α)
Absolute measure of performance
\+1 = beat the market by 1% per period 0 = fair rate of return compared to the risk.
α = Rp - (Rf + Bp (Rm - Rf))
Alpha
Absolute measure of performance.
Ability to beat the market +1% = better than mkt, 0 = fair return to risk, -1% lower than the mkt.
Point and Figure Method
x indicates the price is rising
0 indicates the price is falling
No time element
Only entry is based on significant price movement
X X
X 0 X
X 0 X 0
X 0 X 0
X 0
X 0
Resistance and Support Levels
Resistance Level (ceiling value) Supply increases as stock becomes overpriced.
Support Level
Demand increases as stock becomes undervalued.
Bar chart
Plots daily price changes over time
Typically contains data on high, low, volume
Classic pattern
Technical Indicators
Moving Average
Advance Decline Index
Relative Strength Index
Sentiment Indicators Explained
- Contrarian Approach
- Barron’s Confidence Index
Contrarian Approach
When odd lots of sales are reported as high it means the “little guys” are getting in and its time to get out.
Odd lot sales are usually purchases under 100 shares.
Examples of different trading anomaly’s
Sell Friday, buy Monday
S&P 500 or other index announces a new stock. Buy that stock before the ETF’s and Mutual Funds do.
Small Firm Effect
- Consistently small firms outperform larger firms.
- some form of risk premium
- analysts tend to ignore small firms
- Primarily small firms outperform in January
- Price tends to get beaten down at the end of the year.
What is the serial Correlation Coefficient?
Tests for statistically significant relationships between returns.
Filter Rule
Stock prices move in some cyclical manner
Pick an ex filter %. Buy the stock. When it goes up by that % and sell the stock when it goes down by that %.
