Wk4a

Question 1

Random walk theory

Answer 1

• Movement of stock prices form day to day do not reflect a pattern and statistically movements are rands on

-They should be skewed positively over long term

Question 2

What is the efficient market hypothesis

Answer 2

It views the expectations as equal to optimal forecasts using all available information

Re=Rf
Re=R*
Roof=R*

Question 3

Weak form of market efficiency

Answer 3

Prices reflect information contained in past prices

Question 4

Semi strong form of market efficiency

Answer 4

Prices reflect not only information contained in past prices but all publicly available information

Question 5

Strong form of market efficiency

Answer 5

Prices reflect not only public ally available information (including past prices) but also private information can be possibly acquired

Question 6

What happens when markets are weakly efficient

Answer 6

Asset prices should follow a random walk and technical analysis is not useful

Question 7

If markets are efficient in a semi strong sense

Answer 7

Prices adjust immediately to any announcement such as statements merger acquisitions

Question 8

Strong market efficiency

Answer 8

No fund manager can ever beat the market - other than by luck ( difficult to prove )

Question 9

Testing weak form (2)

Answer 9

We could show that investors with chart analysis do not outperform the market

Question 10

Testing semi strong

Answer 10

We could test that prices jump following any news about a company

Question 11

Testing strong

Answer 11

We could check whether any fund manager is able to beat the market on the long run

We could check whether any sustained performance if a fund manager is a sign of fraud

Question 12

What empirical evidence is in favour of the weak form of market efficiency

Answer 12

• there is some evidence that trading rules based on purely technical analysis does not outperform the market
• you can see that stock price and exchange rates follow a random walk
• no systematic pattern

Question 13

Evidence against weak meh

Answer 13

Small firm effect
Calendar patterns
Market overreaction
Excessive volatility
Mean reversion
New info delay

Question 14

What’s is small firm effect

Answer 14

Many studies have shown that small firms earned abnormally high returns over long periods of time even when the greater risk of these firms have been considered

Question 15

Calendar patterns

Answer 15

Monday effect - returns are lower
January effect - returns are higher than in other months

Question 16

Market overreaction

Answer 16

Stock prices may overreact to new announcements and that pricing errors are corrected slowly

Question 17

Excessive volatility

Answer 17

Fluctuations in stock prices may be greater than is warranted by fluctuations in there fundamental value

Question 18

Mean reversion

Answer 18

Some people have found low returns tend to have high returns in the future and vice versa

Question 19

New info daily

Answer 19

New info is not always immediately incorporated into stock prices

Question 20

Testing semi strong form of MH

Answer 20

Examine the price changes in the period surrounding the takeover announcement
- if the price jumps all of a sudden and not mover before or after the announcement

Question 21

How can we isolate announcement effect

Answer 21

Through abnormal returns the difference between the actual return and the expected return

Ra = ri - Er(ri)

Question 22

Earnings announcement drift