Shared Flashcard Set

Details

BKM 11
BKM 11
10
Finance
Professional
03/11/2012

Additional Finance Flashcards

 


 

Cards

Term
Briefly describe the 3 versions of the EMH
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
Term
What does the EMH state?
Definition
Stock prices should reflect all available information
Term
Fundamental Analysis
Definition
Uses the fundamentals of a firm to determine appropriate price
Term
Techincal Analysis
Definition
Search for predictable patterns in the stock price (chartists)
Term
(3) reasons hard to tell if markets are efficient
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.
Term

2 difficulties with "event studies"

and how to deal with them

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.

Term
2 reasons Efficient Market Anomalies are not necessarily a sign that the market is not efficent
Definition

1)the properties are proxies for fundamental determinants of risk

2) the properties arise just due to data mining

Term
efficient market anomalies (3)
Definition
  1. Small Firm in January Effect: small firms generated superior returns, particularly in January
  2. Book to market ratios: High Book to Market typically outperform the market
  3. Post Annoucement price drift: Cumulative abnormal returns continue to increase even after the information become public.
Term
(3) uses of portfolio management, even with efficent markets
Definition
  1. Diversifaction: select diversfaction strategy to eliminate firm-specific risk
  2. Reflect tax considerations of individual investor
  3. Adjust portfolio to reflect the unique risk profile of investor
Term
Violations of weak form EMH (2)
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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