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Flashcards in MOCKs Deck (20)
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1
Q

Abnormal returns => inefficiency? (based on public info)

A

Market is efficient if no economic agent can get consistent excess returns.
Public info refers to the semistrong form of efficiency.
Not enough to coclude inefficiency for two reasons:
1. The ability to earn an abnormal return is not a violation. consistency matters
2. Chance that there is a mistake in calculation of required return. Joint hypothesis problem. existence of abnormal returns depends on the accuracy of the benchmark return estimation. Market may even be efficient while the procedure of estimation is wrong.

2
Q

Technical analysis

A

Technical analysis - study of historical market data (prices, volumes) in an attempt to identify recurrent and predictable patterns (trends, cycles)

backward-looking

assumes past performance tends to repeat itself in the future.

weakness - what caused certain price movements is unknown, could be a pure coincidence.

3
Q

Fundamental analysis

A

Fundamental analysis - determine the fair value of an asset through analysis of the firm’s business model (sets of factors) in order to forecast future revenues and costs and exploit the potential mispricing by the market

forward-looking

Fair value - PV of future CFs

weakness: quality depends strongly on the accuracy of analysts predictions

4
Q

Efficiency and its relation to fund, tech analysis

A
  • def of efficiency (prices reflect all available information)
  • forms of EMH, what sorts of info are available in each case
  • technical - weak form
  • fundamental - semistrong form
  • tests to prove/reject EMH (excess returns, trading rules with buy and hold strategy)
  • evidence for (filter rules, announcements) and against (MAs,size effects) weak, semistrong forms
  • results of the tests show that even in the cases when market professionals can’t beat the market, part of them can achieve superior results
5
Q

Speculation

A

practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the prices of a tradable good

speculators increase the liquidity of the market. Thus, lead to efficiency

6
Q

Arbitrage

A

arbitrageurs seek to profit from situations where instruments are traded at different prices in different market segments or when two assets with identical CFs do not trade at the same price.

Speculators are exposed to market (price) risk, while arbitrage is risk-free transaction.

7
Q

Theoretical pre-requisites of EMH

A
  • random walk model (changes in prices have the same distribution and are independent of each other)
  • returns are serially uncorrelated (no autocorrelation)
  • no correlation between errors and returns
  • errors are serially uncorrelated
8
Q

Speculative bubble

A

a spike in the asset values which is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values

9
Q

EMH bubbles

A

prices rise over their fair values

autocorrelation in returns

10
Q

systematic risk

A

risk inherent to the entire market or entire market segment
can’t be diversified away
examples: interest rates, recessions, wars

11
Q

unsystematic risk

A

definition (affects a very specific group of assets or an individual security)
can be minimized through diversification (mention non-perfect correlation of securities returns)
examples: death of CEO, investigations against the company, management, shocks in the industry

12
Q

CAPM def

A

equilibrium model
helps determine the fair value of the security
R-Rf=beta*(Rm-Rf)
only one factor: return on a market portfolio and an expected return on security depends on its correlation with the market

13
Q

CAPM assumptions

A
  • homogeneous expectations
  • frictionless markets
  • no transaction costs and taxes
  • risk-averse investors
  • market is in equilibrium at all times
  • borrow/lend at risk-free rate
14
Q

CAPM difficulty

A

difficult to test the CAPM since it requires the use of proxies for the market portfolio

15
Q

Factor models def

A

factors other than beta have all been identified in empirical studies after controlling for beta
factor models are not so restrictive, do not require equilibrium
used to reveal common factors for the markets, useful to assess dependences of securities’ returns of these factors

16
Q

APT assumptions

A

lack of transaction costs and taxes
finite expected values and variances
agents can form well-diversified portfolios

17
Q

APT def

A

APT was designed in response to the Roll critique of the CAPM. and was aimed to solve the problem of the absence of the market portfolio.

returns follow multifactor process

purely practical, empirical framework

18
Q

advantages of APT

A

flexibility (any factor)
easily tested (no joint hypothesis problem), factors are visible
more relaxed in terms of assumptions -> more reliable result
strategy in order to earn abnormal profit

19
Q

BUTs of APT

A

no theoretical framework

suffers data mining

20
Q

Abnormal return

A

return we can get in excess of required return
not the same as arbitrage
we should sell overpriced and buy underpriced and wait until the price changes