Reading #47: Market Efficiency

Question 1

informationally efficient capital market

Answer 1

current price of security fully, quickly and rationally reflects all avail. info

Question 2

in perfectively efficient, use passive or active?

Answer 2

passive because active wld underperf. due to trans. costs and mgmt fees

Question 3

Name factors of market efficiency

Answer 3

of participants, availability of info, impediments to trading, trans& info costs

Question 4

Weak form efficient market

Answer 4

current security prices FULLY reflect all CURRENT avail. security mkt data. cannot use tech analysis to returns (based on past perf)

Question 5

Semi Strong Form market efficiency

Answer 5

sec. prices rapidly adjust without bias to arrival of new public info. cannot use fundamental analysis for returns

Question 6

strong form mkt efficiency

Answer 6

fully reflects PUBLIC and PRIVATE sources and no one has monopolistic access to info

Question 7

loss aversion

Answer 7

investors more risk averse with potential losses and less risk averse with potential gains

Question 8

define overreaction effect

Answer 8

“stocks with poor returns over three to five-year periods that had higher subsequent performance than stocks with high returns in the prior period.”

Question 9

define overreaction effect

Answer 9

“stocks with poor returns over three to five-year periods that had higher subsequent performance than stocks with high returns in the prior period.”

Question 10

define momentum effect

Answer 10

“Stocks with high previous short-term returns that have high subsequent returns”

Question 11

define “Information cascades”

Answer 11

“refers to uninformed traders watching the actions of informed traders when making investment decisions”

Question 12

define Herding behavior

Answer 12

“when trading occurs in clusters, not necessarily driven by information.”

Question 13

define Narrow framing

Answer 13

“refers to investors viewing events in isolation”