term 1 - market efficiency Flashcards
what does the efficient market hypothesis assert?
it asserts that financial markets are informationally efficient if stock prices already reflect all available information and prices change instantly to reflect new information
what is weak form market efficency?
prices reflect past information contained in stock market data.
what is the implication of weak form market efficiency?
investors cannot use past stock prices to identify mispriced securities.
what is technical analysis?
refers to the pratice of using past patterns in stock prices to identify future patterns in prices. it cannot be profitable in a market which is at least weak form efficent
what is semi strong form market efficiency?
prices reflect all publicly available information. so an investor can not use publicly known information on earnings announcements, quality of management, patents, balance sheet composition etc to identify mispriced securities
what is fundamental analysis?
refers to the pratice of using finanical statements, announcements and other publically available information about firms to select stocks. it is not profitable in a market which is at least semi strong form efficient
what is strong form market efficency?
prices reflect all publically available and private information not made public yet ie knowledge about an impending takeover bid. according to the strong form market efficiency hypothesis, even company insiders are unable to make profits by acting on pertinent information not yet known to the public
what does the US securities and exchange commission oversee?
they oversee the financial markets and make effort to prevent insiders from profiting by exploiting their privaledged positon
what are the implications of the efficient market hypothesis?
what is the key to sucessful technical analysis?
the key to a sucessful technical analysis is a sluggish response of stock prices to fundamental supply and demand factors.
what does technical analysis do?
Technical analysis is essentially the search for recurrent and predictable patterns in stock prices. Technical analysts are sometimes called chartists because they study records or charts of past stock prices, hoping to find patterns they can exploit to make a profit. Chartists use concepts such as resistance and support levels and relative strengths of assets.
what does fundamental analysis do?
Fundamental analysis uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock prices. This analysis is supplemented with further
detailed economic analysis, ordinarily including an evaluation of the quality of the firm’s management, the firm’s standing within its industry, and the
prospects for the industry as a whole. Fundamental analysis is much more difficult than merely identifying well-managed firms with good prospects. The goal is to identify firms that are better than everyone else thinks they are, e.g. poorly run firms can be great bargains if they are not as bad as their stock prices suggest.
why is diversification critical in portfolio selection?
even if all stocks are priced fairly, each still poses firm specific risk that can be eliminated through diversification
how is rational investment policy impacted by taxs?
what is the role of the portfolio manager?
the role of a portfolio manager is not necessarily to beat the market but rather to establish and manage a portfolio consistent with investors objectives
what do tests of market efficiency rely’?
tests of market efficiency rely on the identification of abnormal returns resulting from particular investment strategies.
what is the event study process?
what is the joint hypothesis problem?
what is the momentum?
positive serial correlation means that positve returns tend to follow positive returns and vice versa
what is reversal?
negative serial correlation means that positive returns tend to be followed by negative returns and vice versa
what is serial correlation?
serial correlation to the tendency of stock returns to be related to past returns
what is momentum strategy?
it is a strategy of buying stokcs that have performed well in the past and selling stocks that have performed poorly in the past
what is contrarian strategy?
a strategy of buying past losers and selling past winners
what did Jegaseesh and Titman (1990) find about returns of momentum strategies>
what is the overeaction hypothesis?
what period is momentum in stock returns?
Momentum in stock returns is a phenomenon over short to
intermediate periods.
what study provides evidence for the contrarian strategy?
what is the PE effect?
what is the small firm (in january) effect
is the size effect still relevant?
what is the january effect?
what is the day of the week effect?
what is the book to market ratio effect?
what is the price earnings drift?
how do proponents of market efficiency explain market anomalies?
what is the risk premium vs market inefficiency explanation for PE, small firm, market to book, momentum and long run reversal effects?
