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Flashcards in BKM 11 Deck (36)
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1
Q

Random walk

A

Stock price changes should be random and unpredictable

2
Q

Efficient market hypothesis

A

The notion that stocks already reflect all available information

3
Q

Weak-form hypothesis

A

Stock prices already reflect all information that can be derived by examining market trading data such as history of past prices, trading volume, or short interest.
Trend analysis is fruitless.

4
Q

Semistrong-form hypothesis

A

All publicly available information regarding the prospects of a firm must be already reflected in a stock’s price

5
Q

Strong-form hypothesis

A

Stock prices reflect all information relevant to the firm, even including information available only to company insiders.
Quite an extreme

6
Q

Technical analysis

A

Search for recurrent and predictable patterns in stock prices

7
Q

Resistance/support levels

A

Above which it is difficult for stock prices to rise, or below which it is unlikely for them to fall
Believed to be determined by market psychology

8
Q

EMH and technical analysis

A

EMH implies technical analysis is without merit

9
Q

Fundamental analysis

A

Uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock prices

10
Q

EMH and fundamental analysis

A

Most fundamental analysis is doomed to failure

11
Q

Passive investment strategy

A

Makes no attempt to outsmart the market; proponents of EMH prefer this strategy as other efforts are wasted

12
Q

Index fund

A

Fund designed to replicate performance of a broad-based index of stocks

13
Q

Role for portfolio management in efficient market

A

Tailor portfolio to investor needs depending on factors such as age, tax bracket, aversion, etc.

14
Q

Event study

A

Technique of empirical financial research that enables observers to assess the impact of a particular event on a firm’s stock price

15
Q

Abnormal return (definition)

A

Difference between actual stock return and a benchmark

16
Q

Abnormal return (formula)

A

e(t) = r(t) - a + br(M(t))

a = average rate of return with zero market return

17
Q

Cumulative abnormal return

A

Sum of all abnormal returns over a given time period; event studies could be complicated due to leakage of information

18
Q

SEC and availability of information

A

Dramatic increase in value with announcement date indicates these are indeed news to the market, not already reflected in the price

19
Q

Three factors the imply EMH does not hold

A

Magnitude Issue
Selection Bias Issue
Lucky Event Issue

20
Q

Magnitude issue

A

Small percentage increase could be large $-wise based on size of portfolio

21
Q

Selection bias issue

A

Only investors who find an investment scheme that does not generate abnormal returns will report findings

22
Q

Lucky event issue

A

Any bet on a stock is a coin toss, given EMH

Ex: Coin-flipper with 75% heads

23
Q

Weak-form tests

A

Patterns in stock returns

24
Q

Serial correlation

A

Tendency for stock returns to be related to past returns; positive over short horizons

25
Q

Momentum effect

A

Good or bad recent performance of particular stocks continues over time; evidence of short- to intermediate-horizon price momentum in both aggregate and cross-sectional

26
Q

Tests of long-horizon returns

A

Suggestions of pronounced negative long-term serial correlation in the performance of the aggregate market

27
Q

Fads hypothesis

A

Stock market may overreact to relevant news

28
Q

Reversal effect

A

Losers rebound and winners fade back

Stock market overreacts to relevant news

29
Q

Market anomalies

A
P/E effect
Small firm in January effect
Neglected firm effect
Liquidity effects
Book-to-Market ratios
Post-earnings announcement price drift
30
Q

P/E effect

A

Low price-earnings ratio stocks have provided higher returns than high P/E portfolios;
Low P/E = higher expected returns, so returns are not properly adjusted for risk

31
Q

Small-firm-in-January effect

A

Smaller-firm portfolios tend to be riskier;
Even when adjusted for risk (CAPM), still a consistent premium;
Concentrated in first 2 weeks of January

32
Q

Neglected-firm effect

A

Information about smaller firms is less available; neglected firms might be expected to earn higher returns as compensation for risk associated with limited information

33
Q

Liquidity effect

A

Small and less-analyzed stocks are less liquid; investors demand liquidity premium to invest in such stocks

34
Q

Book-to-Market ratios

A

Ratio of book value of firm’s equity to market value of firm’s ratio; book-to-market ratio might serve as a proxy for a risk factor

35
Q

Post-earnings announcement drift

A

Market adjusts to information only gradually, resulting in sustained period of abnormal returns

36
Q

Insider transactions

A

To no avail; abnormal returns not of sufficient magnitude to overcome transaction costs