Ch. 11: Efficient Market Hypothesis | FIN 3144 - Investments: Debt-Equity-Deriv, Quizzes of Investment Theory

Download Ch. 11: Efficient Market Hypothesis | FIN 3144 - Investments: Debt-Equity-Deriv and more Quizzes Investment Theory in PDF only on Docsity! TERM 1 Semi-Strong Market Efficiency DEFINITION 1 When Market Information doesn't travel too fast or too slow TERM 2 Strong Market Efficiency DEFINITION 2 When Market information travels very fast, efficiently, and almost instantly; there is NOT an advantage over the general public TERM 3 Weak Market Efficiency DEFINITION 3 When Market information travels slowly and very inefficiently, then there is an Advantage over the general public TERM 4 Stock Prices that change in response to New (unpredictable) information..also DEFINITION 4 Must move unpredictably.Stock Price changes follow a Random Walk TERM 5 Technical Analysis DEFINITION 5 Using prices and volume information to predict future prices TERM 6 Success of Technical Analysis depends on.. DEFINITION 6 the sluggish response of stock prices to fundamental Supply- and-Demand factorsWeak form efficiency TERM 7 Fundamental Analysis DEFINITION 7 Using economic and accounting information to predict stock prices-Try to find firms that are better than everyone else's estimates-Try to find poorly run firms that are not as bad as the market thinks-Semi-Strong form efficiency TERM 8 Active Management DEFINITION 8 -An Expensive strategy-Suitable only for very large portfolios TERM 9 Passive Management DEFINITION 9 No attempt to outsmart the market-Accepts the (EMH) Efficient Market Hypothesis-Very Low Cost strategyEx: Index Funds and ETFs TERM 10 Portfolio Management DEFINITION 10 Even if the market is efficient, a role exists for Portfolio Management:-Diversification-Appropriate Risk level-Tax considerations TERM 21 Keim and Stambaugh DEFINITION 21 Bond spreads can predict market returns TERM 22 Semistrong Tests: Anomalies DEFINITION 22 P/E EffectSmall Firm Effect (January Effect)Neglected Firm Effect and Liquidity EffectsBook-to-Market RatiosPost- Earnings Announcement Price Drift TERM 23 Strong-Form Tests: Inside Information DEFINITION 23 The ability of insiders to trade profitability in their own stock has been documented in studies by Jaffe, Seyhun, Givolyn, and PalmonSEC requires all insiders to register their trading activity TERM 24 Interpreting the Anomalies DEFINITION 24 The most puzzling anomalies are price-earnings, small-firm, market-to-book, momentum, and long-term reversal-Fama and French argue that these effects can be explained by risk premiums-Lakonishok, Shleifer, and Vishnu argue that these effects are evidence of inefficient markets TERM 25 Interpreting the Evidence DEFINITION 25 Anomalies or data mining?-Some anomalies have disappeared-Book-to-market, size, and momentum may be real anomaliesAnomalies over time-Attempts to exploiting them move prices to eliminate abnormal profits-Chordia, Subramanyam, and Tong study found attenuating TERM 26 Interpreting the Evidence DEFINITION 26 Bubbles and market efficiency-Prices appear to differ from intrinsic-Rapid run up followed by crash-Bubbles are difficult to predict another and exploit TERM 27 Stock Market Analysts DEFINITION 27 Some analysts may add value, but:-Difficult to separate effects of new information from changes in investor demand- Findings may lead to investing strategies are too expensive TERM 28 Mutual Fund Performance DEFINITION 28 The conventional performance benchmark today is a four- factor model, which employs:-The three Fama-French factors (the return on the market index, and returns to portfolio based on size and book-to-market ratio-plus a momentum factor (a portfolio constructed based on prior-year stock return). TERM 29 Mutual Fund Performance DEFINITION 29 Consistency-Carhart - alphas positive before fees, negative after-Bollen and Busse - support performance persistence over short time horizons-Berk and Green - skilled managers will attract new funds until the costs of managing those extra funds drive alphas down to zero TERM 30 So, are markets efficient DEFINITION 30 -The performance of professional managers is broadly consistent with market efficiency-Most managers do not do better than the passive strategy-There are, however, some notable superstars: Peter Lynch, Warren Buffett, John Templeton, George Soros