Utility Theory and Bayes Rule

Question 1

What is utility theory

Answer 1

mathematical representation of preferences

Question 2

why do some stocks have higher expected return than others

Answer 2

higher return is compensation for higher risk

Question 3

why do investors trade

Answer 3

manage risk

Question 4

what is strong form efficieny

Answer 4

stock prices reflect all info, public and private; prices react as soon as new info is generated

Question 5

what is semi strong form efficiency

Answer 5

stock prices incorporate al public info; prices react as soon as info is made public

Question 6

what is weak form efficiency

Answer 6

stock prices incorporate all historical data; past stock prices cannot help you predict future changes

Question 7

what is bayes rule

Answer 7

determines probability of event based on probability of conditions that may be related to event

Question 8

what kind of risk do portfolios diversity

Answer 8

idiosyncratic risk

Question 9

what is idiosyncratic risk

Answer 9

risk that effects specific stock/portfolio

Question 10

what is systemic risk

Answer 10

risk that effects whole market