Term
True/False
Firms with the lowest market captialization (value) will have the greatest influence on the index |
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Definition
FALSE
Firms with the GREASTEST market captialization (value) will have the greatest influence on the index
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Term
Bond indexes are challenging to create because of what? |
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Definition
Bond indexes are challenging to create because of inadequate price information on some bonds and a changing universe of bonds |
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Term
Composite indexes hae both stock and bond components and can include only what? |
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Definition
Composite indexes hae both stock and bond components and can include only domestic securities or securities in many countries |
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Term
Global stock indexes are calculated for what? |
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Definition
Global stock indexes are calculated for companies in many different countries |
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Term
What weighting schemes do firms with greater market capitalizations have a greater impact on the index than do firms with less market capitalization? |
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Definition
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Term
Stock spits potentially cause a downward bias in what index weighting schemes? |
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Definition
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Term
What index scheme would produce returns closest to those of a portfolio of index stock with an equal dollar investment in each stock in the index? |
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Definition
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Term
What index weighting scheme would produce returns closest to those of a portfolio of index stocks with an equal number of shares of each index stock? |
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Definition
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Term
What is a reason why creating bond market indexes is more difficult than creating stock market indexes? |
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Definition
The universe of bonds is constantly changing because of numerous new issues, bond maturities, calls, and bond sinking funds |
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Term
Why does market capitalization have a large effect on value weighted indexes? |
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Definition
Market capitalization have a large effect on value weighted indexes because firms with the largest market cap may dominate the index |
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Term
Characteristics of a Well functioning securities market |
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Definition
- Timely and accurate information on the price and volume of past transactions and on current supply and demand conditions
- Liquidity (ability to buy or sell quickly at a known price)
- Internal efficiency (refers to low transactions costs)
- Informational efficiency (prices adjust rapidly to new information so the prevailing market prices reflects all available information regarding the value of the assets)
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Term
What are Primary Capital Markets and Secondary Capital Markets? |
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Definition
Primary Capital markets - refers to the sale of new issues of securities which are usually issued with the help of an underwriter (IPO)
Secondary financial markets - are where securities trade after their IPO. secondary markets provide liquidity. Liquid secondary markets provide investors with continuous infomration about the market price of their securities
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Term
Three services that an Underwrite provides to the issuer of a security |
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Definition
- Origination, which involves the design planning and registration of the issue
- Risk bearing, which means the underwriter insures or guarantees the price by purchasing the securities
- Distribution, which is the sale of the issue
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Term
What are call and continuos markets? |
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Definition
Call markets- the stock is only traded at specific times. Method used in smaller markets to set opening prices and prices after trading halts on major exchanges
Continuous markets- trades occur at any time the market is open. the price is set by either the auction process or by dealer bid-ask quotes |
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Term
Characteristics of NYSE and Nasdaq |
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Definition
NYSE- buyers and sellers submit their orders to a central location, and buy and sell orders are matched by brokers. Referred to as order-driven, price driven or pure auction markets. There are specialist who stand by on the exchange to buy or sell securities to provide liquidity and maintain orderly markets
Nasdaq- Over the counter market , trades occur electronically. Dealer market, number of market makers provide a bid and ask prices continuosly during the day. bring together the quotes of competing dealers so investors can transact at best possible price |
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Term
Describe: Regional Exchanges,
Third Market, and
Alternative trading systems |
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Definition
Regional Exchanges - same as national exchanges except give local brokerage firms that are not members of national exchanges access to stocks
Third market- segment of the OTC market. Non member investment firms can make markets in and trade registered securities without going through the exchange
Alternative trading systems- computerized systems that do not formally list stocks. referred to as "fourth market" |
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Term
Four Categories of Exchange membership |
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Definition
- The specialist- controls the limit order books, posts bid and ask prices and trades for his own account
- The comission broker executs trades for a brokerage firm
- Floor Brokers- act as freelance brokers for other commission brokers
- Registered Traders- trade for their own accounts
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Term
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Definition
- Market Orders- buy or sell at the best price available
- Limit orders- specify a maximum or minimum price. Limit Buy= has a limit below the current price. Limit sell has a limit above the current price
- Short sale orders- orders where a trader borrows stock, sells it, and then purchases the stock later to return the stock.
- Stop Loss orders- used to prevent losses or to protect profits. Stop loss sell= sell at a price below the current level. Stop loss buy= buy if price rises above current level
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Term
Functions of Market makers (specialist) |
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Definition
- Handle the lmit order books.
- act as dealers by buying and selling stocks for their own accounts to maintain an orderly market and provide liquidity
Provide Bridge liquidity (acting as a seller in an up market and as a buyer in a down market which helps narrow the bid and ask prices) |
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Term
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Definition
- borrow and sell securities through a broker
- return the securities at the request of the lender or when the short sale is closed out
- keep a portion of the proceeds of the short sale on deposit with the broker
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Term
Three Rules to Short Sales |
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Definition
- Uptick Rule- stocks can only be shortened in an up market. Short sale can only trade at a price higher than the previous trade.
- Short seller must pay all dividends due to the lender of the security
- short seller must deposit collateral to guarantee the eventual replacement of the security
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Term
What are Margin transactions? |
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Definition
Involve buying the securities with borrowed money. Margin lending rate is about 1.5% above the bank call money rate (which is about 1% below the prime rate). Initial margin is the amount of the trade that the investor has to provide.
Trading on margin can provide for higher returns than just trading on account but can also magnify losses |
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Term
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Definition
investors required equity position in the account. Applicable to both margin and short sale positions.
Margin call- when investor has to either liquidate position or bring account back to minimum maintenance margin requirements
Trigger price(price at which at maintenance margin) =
Initial purchase price * ((1-initial margin)/(1-maintenance margin)) |
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Term
Three limitations to perfectly efficient markets |
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Definition
1. processing new information has costs and takes time--changes in price due to unexpected announcements are not immediate and require fundamental analysis to adjust prices to the appropriate levels--fast analysts will be rewarded
2. market prices that are not precisely efficient may remain if gains to be made by information trading are less than transaction costs of trading
3. limits on the abilities of arbitrage to bring prices to efficient levels |
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Term
Four problems that prevent arbitrageurs from correcting pricing anomalies |
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Definition
1. there is no guarantee of when or even if apparent mispricings will be corrected
2. it may be difficult to find two securities with exactly the same risk so that a mispricing can be exploited by taking a long position in an underpriced security and an offsetting position in a correctly priced security with the same risk
3. arbitrageurs do not have unlimited funds--only more significant mispricings may be exploited while others are allowed to persist
4. arbitrageurs must depend on their sources of capital and obligations under those agreements |
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Term
mispricing justifications |
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Definition
1. small firms may experience abnormal positive returns because they include types of risk that are not accounted for in current pricing models
2. trading strategies used to exploit anomalies carry additional risk and must be justified by additional return--if not, mispricings may remain |
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Term
Biases that might explain existence of pricing anomalies |
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Definition
data mining--some results appear to be statistically significance merely by chance (type I error)
survivorship bias--be careful not to include only funds/securities that have survived (not been terminated)
sample selection bias--accidentally not a random sample
small sample bias--sample is too small to rep. population
nonsynchronous trading--stale prices listed at close may appear frequently for infrequently traded stocks--this may not be the actual price you could trade for at close, but a price from earlier in the day |
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Term
why mispricing persists and valid anomalies may be non profitable |
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Definition
1. lack of theoretical explaination--arbitrageurs hesitate
2. transaction costs
3. small profit opportunities
4. trading restrictions
5. irrational behavior
6. other limits on arbitrage |
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