Nafisa Zahra
Flashcards by Nafisa Zahra, updated more than 1 year ago
Nafisa Zahra
Created by Nafisa Zahra over 7 years ago


University Investments (Eff. market hypoth., behavioural finance & technical analysi) Flashcards on Untitled_12, created by Nafisa Zahra on 10/14/2013.

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Question Answer
If markets are efficient, what should be the correlation coefficient between stock returns for two non-overlapping time periods? The correlation coefficient between stock returns should be zero. If not, an investor could use returns for one period to predict returns in later periods and make abnormal profits
What is a biased response? A biased response will see an initial response to information and a subsequent revision
Company A just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon? The market may have expected an even greater increase in annual earnings. Compared to prior expectations this was a disappointment
Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis? hinly traded stocks will not have a considerable amount of market research performed on the companies they represent. This neglected-firm effect implies a greater degree of uncertainty with respect to smaller companies. Thus positive CAPM alphas among thinly traded stocks do not necessarily violate the efficient market hypothesis since these higher alphas are actually risk premia, not market inefficiencies
What are some information processing biases/errors conservatism, representativeness, overconfidence and forecasting errors
What is conservatism bias Investors are too slow in updating beliefs in response to new evidence. Prices will fully reflect new info gradually and gives rise to momentum in stock market returns
What is the representativeness bias? People commonly do not take into account the size of a sample, acting as if a small sample is representative of population
Why may behavioural biases not affect equilibrium asset prices? Behavioural biases might contribute to the success of technical trading rules as prices gradually adjust towards their intrinsic values and the actions of arbitrageurs might move security prices towards their intrinsic values.
What is the main point made by advocates of behavioural finance? Investors make errors in information processing and decision making that could result in mispricing of securities. However they don't provide guidance as to how these errors can be exploited
What is the main point made by efficient market advocates? Publicly available information (and for advocates of strong-form efficiency, even insider information) is reflected in securities prices and price adjustments to new information occur very quickly. Prices are at fair levels so that active management is very unlikely to improve performance above a broadly diversified index portfolio
What is data mining? Why must technical analysts be careful not to engage in it? Data mining is the process by which patterns are pulled from data. Technical analysts must be careful not to engage in data mining as great is the human capacity to 'uncover' patterns where no patterns exist. THey must avoid data mining to support a theory rather than using data to test a theory. Importantly although these rules worked in the past they may not work in the future
what should you look at if you're asked whether a company has shown strength over a period? you should divide the price of the company by the industry index number at the beginning and then at the end and see if the ratio has increased. If it has it means in outperformed other firms
What is the breadth of the market? Extent to which movement in a market index is reflected widely in the price movements of all stocks in the market
What is a moving average of a stock index The average level of the index over a given interval of time
From moving averages, what are indications to buy or sell? The indications to buy or sell are, if the market price breaks through the moving average line from below, it is taken as a bullish signal because it signifies a shift from a falling trend (with prices below the moving average) to a rising trend (with prices above the moving average). Conversely, when prices fall below the moving average, it's time to sell
q1 tute 9 CFA DO IT
What is mental accounting Specific form of framing in which people segregate decisions. For example an investor may take a lot of risk with one investment account, but establish a very conservative position with another account that is dedicated to her child's education
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