Term
| Briefly describe the 3 versions of the EMH |
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Definition
1) Weak Form: Stock Prices reflect all information that can be derived from market data
2)Semistrong form: Stock prices reflect all publicly available infomation about the firm's prospects
3)Strong form: Stock prices reflect all relevant information, public and private |
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Term
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Definition
| Stock prices should reflect all available information |
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Term
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Definition
| Uses the fundamentals of a firm to determine appropriate price |
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Term
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Definition
| Search for predictable patterns in the stock price (chartists) |
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Term
| (3) reasons hard to tell if markets are efficient |
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Definition
1)Magnitude issue: Impact of the investment manager may be very small relative to normal volatility of market
2)Selection Bias Issue: Once an investment scheme becomes know, it will no longer generate abnormal returns
3)Lucky event issue: the number of investors is so large, by chance some must make huge returns. |
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Term
2 difficulties with "event studies"
and how to deal with them |
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Definition
1) Stock price may respond to a wide range of economic news in addition to the specific event. FIX: base the impact on the abnormal return
2)Information about the event may be leaked prior to the actual event. FIX: measure cum abnormal return starting prior to the event. |
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Term
| 2 reasons Efficient Market Anomalies are not necessarily a sign that the market is not efficent |
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Definition
1)the properties are proxies for fundamental determinants of risk
2) the properties arise just due to data mining |
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Term
| efficient market anomalies (3) |
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Definition
- Small Firm in January Effect: small firms generated superior returns, particularly in January
- Book to market ratios: High Book to Market typically outperform the market
- Post Annoucement price drift: Cumulative abnormal returns continue to increase even after the information become public.
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Term
| (3) uses of portfolio management, even with efficent markets |
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Definition
- Diversifaction: select diversfaction strategy to eliminate firm-specific risk
- Reflect tax considerations of individual investor
- Adjust portfolio to reflect the unique risk profile of investor
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Term
| Violations of weak form EMH (2) |
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Definition
1) Momentum: Market sectors with best or worst recent returns, the performance continues over time. Portfolios of recent high performers beat the market
2) Reversal Effect: Market may first overreact, leading to reversal after big move. Buy recent heavy losers should be profitable. |
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