Investments ch 7 & 8 Concept Q's

beaten

Three generalities about market efficiency can be made: #3 If the stock market can be ___, the way to do so is not obvious.

representativeness heuristic

concluding that there are casual factors at work behind random sequences, or if something is random, it should look random

overdue, more

gamblers fallacy: because an event has not happened recently, it has become ___ and is ___ likely to occur

loss aversion

if you suffer from ___ it is sometimes said that you have get-evenitsis

moving average charts

these are average daily prices or index levels calculated using a fixed number of previous prices that are updated daily

implementation costs

these costs include transaction costs such as bid ask spreads, brokerage commissions, and margin interest

turn of the year

these returns are higher than the rest of the day returns

noise trader, implementation costs, firm specific risk

these three risks and costs can create barriers or limits to arbitrage, and a mispricing may persist because arbitrage is too risky or too costly

weak form efficient market

this is one in which past prices and volume figures are of no use in beating the market. If so, then technical analysis is of little use

semistrong form of efficient market

this is one in which publically available information is of no use in beating the market. If so, then fundamental analysis is of little use

strong form efficient market

this is one of which information of any kind, public or private, is of no use in beating the market. If so, then inside information is of little use

breakout

this occurs when a stock passes through either a support or resistance level

excess return

this on an investment is the return in excess of that earned by other investments that have the same risk

beating the market

this phrase means consistently earning positive excess returns

strong

If a market is ____-form efficient, no information of any kind, public or private, is useful in beating the market.

substantial

If a market is strong-form efficient, no information of any kind, public or private, is useful in beating the market. But, it is clear that significant inside information would enable you to earn ___ excess returns.

Frame dependence

If an investment problem is presented in two different (but really equivalent) ways, investors often make inconsistent choices. That is, how a problem is described, or framed, seems to matter to people.

tipper

In illegal insider trading, the _____ is the person who has purposely divulged material non-public information.

semi

In its ___-strong form, the EMH states simply that stock prices fully reflect publicly available information.

changes, levels

An important aspect of prospect theory: people focus on ___ in wealth versus ___ of wealth.

irrelevant

House money: Whether you lose money from your original investment or lose money from your investment gains is ____.

Efficient Market Reaction

How new information gets into stock prices: The price instantaneously adjusts to the new information

past, future

Does Old Information Help Predict Future Stock Prices? Researchers have used sophisticated techniques to test whether ___ stock price movements help predict ___ stock price movements. Some researchers have been able to show that future returns are partly predictable by past returns. BUT: there is not enough predictability to earn an excess return.  Also, trading costs swamp attempts to build a profitable trading system built on past returns.  Result: buy-and-hold strategies involving broad market indexes are extremely difficult to outperform.

adjustment, size

Event studies: Researchers have examined the effects of many types of news announcements on stock prices. Such researchers are interested in: The ____ process itself The ___ of the stock price reaction to a news announcement.

abnormal return

Event studies: observed return - expected return

inefficient, irrational, optimistic, arbitrage

For a market to be ___, all three conditions must be absent. That is, it must be that many, many investors make ____ investment decisions, and the collective irrationality of these investors leads to an overly ___ or pessimistic market situation, and this situation cannot be corrected via ___ by rational, well-capitalized investors.

prospect theory

Frame Dependence Loss Aversion The House Money Effect are judgement errors that are also consistent with the predictions of ___

firm specific risk

Gm's stock price is too low, so you buy. Then some unanticipated bad news drives GMs stock price lower

arbitrageurs

Suppose collective irrationality does not balance out. Suppose there are some well-capitalized, intelligent, and rational investors. If rational traders dominate irrational traders, the market will still be efficient

anchoring

associating a stock with its purchase price, i.e. fixating on a reference price

gamblers fallacy

assuming that a departure from what occurs on average will be corrected in the short run

Company insiders can make perfectly legal trades in the stock of their company. They must comply with the reporting rules made by the SEC. When company insiders make a trade and report it to the SEC, these trades are reported to the public by the SEC. In addition, corporate insiders must declare that trades that they made were based on public information about the company, rather than "inside" information.

What is considered legal insider trading?

informed trader

When an investor makes a decision to buy or sell a stock based on publicly available information and analysis, this investor is said to be an ___

resistance level

a price or level above which a stock or the market as a whole is unlikely to rise

support level

a price or level below which a stock or the market as a whole is unlikely to go

loss aversion

a reluctance to sell investments after they have fallen in value

abnormal

according to the EMH, the ___ return today should only relate to information released on that day

rest of days

any other daily returns

behavioral finance

area of research that attempts to understand and explain how reasoning errors influence investor decisions and market prices

turn of the month

daily returns from the last day of any month or the following three days of the following month

yes

do bubbles eventually pop?

rational investors

do not systematically overvalue or undervalue financial assets. If every investor always makes perfectly rational investment decisions, it would be very difficult to earn an excess return.

market efficiency research

examines the relationship between stock prices and available information. The important research question: is it possible for investors to "beat the market?" Prediction of the EMH theory: if a market is efficient, it is not possible to "beat the market" (except by luck). examines the relationship between stock prices and available information. The important research question: is it possible for investors to "beat the market?" Prediction of the EMH theory: if a market is efficient, it is not possible to "beat the market" (except by luck).

Fibonacci numbers

looking for percentage retracement levels.

crash

significant and sudden drop in market values

overconfidence error

we are this regarding our abilities in many areas

strong, semi strong, weak

what are the three types of market efficiencies?

house money

what is an example of mental accounting?

plummeting

when bubbles pop, investors find themselves holding assets with ____ values

mental accounting

when people engage in this, they tend to segment their money into mental "buckets" such as spending regular income differently than bonuses or Investing prudently in a retirement account, but taking wild risks with a separate stock account.

Wall street journal, reading quarterly reports, gathering financial information from internet, talking to investors

where can an informed trader posses information?

small

why would a market be efficient? even a relatively ____ performance enhancement can be worth a tremendous amount of money

competition, profit

why would a market be efficient? the drive force toward market efficiency is simply ___ and the ___ motive

cognitive psychology

much of behavioral finance research stems from the research in the area of _____ which is the study of how people think, reason, and make decisions

event study

the test for the effects of new information on stock prices, researchers use an approached called....

Elliot wave principle

there is a repeating 8 wave sequence, first 5 are impulse and the last three are corrective (regarding investor sentiment)

delayed reaction

How new information gets into stock prices: the price partially adjusts to the new information

chase past returns

Mutual fund investing and the clustering illusion.  Every year, funds that have had exceptionally good performance receive large inflows of money. There is a universal disclaimer: "Past performance is no guarantee of future results." Nonetheless, investors ______.

non-public information

In the U.S. (and in many other countries) it is illegal to make profits on _____. It is argued that this ban is necessary if investors are to have trust in U.S. stock markets.

house money

Las Vegas casinos have found that gamblers are far more likely to take big risks with money that they have won from the casino

The risk-adjustment problem The relevant information problem The dumb luck problem The data snooping problem

Market efficiency is difficult to test for these four basic reasons:

liquidate

Noise trader risk is important because the worsening of a mispricing could force the arbitrageur to ___ early and sustain steep losses

illusion of knowledge

One aspect of overconfidence typically stems from a belief that information you hold is superior to information held by other investors. You believe, therefore, that you are able to make more informed judgments.  This belief is referred to as the:

more, less

Overconfidence: Researchers have found that investors who make relatively __ trades have lower returns than investors who trade ___ frequently

limits to arbitrage

The notion that, under certain circumstances, it may not possible for rational, well-capitalized traders to correct a mispricing, at least not quickly.

fairly, small, little

Some Implications if Markets are Efficient: Security selection becomes less important, because securities will be ___ priced. There will be a ___ role for professional money managers, and it makes ___ sense to time the market.

Yes

Some Implications of Market Efficiency: If you were to ask people you know whether stock market prices are predictable, many of them would say ____.

predict

Some Implications of Market Efficiency: To their surprise, and perhaps yours, it is very difficult to ___ stock market prices.

random

Some Implications of Market Efficiency: In fact, considerable research has shown that stock prices change through time as if they are ____ .

random walk

Some Implications of Market Efficiency: When there is no discernible pattern to the path that a stock price follows, then the stock's price behavior is largely consistent with the notion of a ____

market inefficiencies

Some people believe that cognitive (reasoning) errors made by investors will cause ___

deviations from rationality

Suppose that many investors are irrational. The net effect might be that these investors cancel each other out. So, irrationality is just noise that is diversified away. What is important here is that irrational investors have different beliefs

SEC

The United States ____ enforces laws concerning illegal trading activities.

market sentiment

The prevailing mood among investors about the future outlook for an individual security or for the market.

losses, gains

The foundation of prospect theory: investors are much more distressed by prospective ____ than they are happy about prospective ____.

Frame Dependence Loss Aversion The House Money Effect

There are three major judgment errors consistent with the predictions of prospect theory.

unprofitable

Three facts to keep in mind about market anomalies. Finally, anomalies are not easily used as the basis for a trading strategy, because transaction costs render many of them ____.

do not

Three facts to keep in mind about market anomalies. First, anomalies generally (do/do not) involve many dollars relative to the overall size of the stock market.

disappear

Three facts to keep in mind about market anomalies. Second, many anomalies are fleeting and tend to ___ when discovered.

difficult

Three generalities about market efficiency can be made: #1 Short-term stock price and market movements appear to be ___ to predict with any accuracy.

quickly

Three generalities about market efficiency can be made: #2 The market reacts ___ to new information, and various studies find little or no evidence that such reactions can be profitably exploited.

market anomalies

aspects of stock price behavior that are both baffling and potentially hard to reconcile with market efficiency

pattern seeking

cognitive psychologists have discovered that the human mind is a ___ device

clusters

if you believe in the hot hand you will likely reject this fact because you know better from watching basketball shooters. you are being fooled by randomness because randomness often appears in __

tippee

in illegal insider trading, the ___ is the person who has knowingly used such information in an attempt to make a profit

overconfidence

investors tend to invest too heavily in shares of the company for which they work. This loyalty can be bad financially

efficiency

investors use their information in a rational manner, these are independent deviations from rationality, and existing arbitrageurs are so powerful that any one of them leads to ____

efficient market hypothesis

is a theory that asserts: As a practical matter, the major financial markets reflect all relevant information at a given time.

no

is all insider trading illegal? (Yes, No?)

mental accounting

is when investors treat each investment separately as opposed to considering the overall wealth of their portfolios. This bias may induce investors to sell winners too early and keep losers too long.

breakeven, disposition effect

loss aversion is also known as ___ or ____

technical analysis

many investors try to predict future stock price movements based on investor sentiment, errors in judgment, or historical prices

relative strength

measures the performance of one investment relative to another

bubble

occurs when market prices soar far in excess of what normal and rational analysis would suggest

clustering illusion

our human belief that random events that occur in clusters are not really random. Example: if a coin is flipped 20x, there is about a 50% chance of flipping four heads in a row. But if you flip four in a row, its seen as a hot hand...

trade too much

overconfidence: if you are overconfident about your investment skills, it is likely that you will ____

prospect theory

provides an alternative to classical rational economic decision making

cognitive errors

reasoning errors are often called ___-

day of the week effect

refers to the tendency for Monday to have a negative average return—which is economically significant.

January effect

refers to the tendency for small cap stocks to have large returns in January.

snakebite effect

refers to the unwillingness of investors to take a risk following a loss (opposite influence of overconfidence)

less

snakebite effect makes people ___ confident in investing following a loss

insider traders

some informed traders are also ____

illegal insider trading

someone who has material that is not public information. This information can impact the stock price and this person can be charged when he/she acts on such information in attempt to make a profit

noise trader risk

someone whose trades are not based on information or financially meaningful analysis. These people could act together to worsen a mispricing. T\

bearish

technical analysts search for (negative) signals about stock prices or market direction

bullish

technical analysts search for (positive) signals about stock prices or market direction

does not

the EMH (does/does not) require that every investor be rational

well financed investors

the EMH suggests that there are ____ that keeps markets efficient as they are prepared to buy and sell to take advantage of any mispricing in the market

closing tick

the difference between the number of shares that closed on an uptick and those that closed on a downtick

overreaction and corrections

the price over adjusts to the new information and gets into stock prices: information but eventually falls to the appropriate price

closing arms

the ratio of average trading volume in decline issues to average trading volume in advancing issues. This uses data from the previous close

incentives

why would a market be efficient? the profit potential creates ___ to unearth relevant information and use it