Finance HW 6: EMH

If a market is strong form efficient...

it is also semistrong and weak form efficient

Most tests of semistrong efficiency are

joint tests of market efficiency and the risk-adjustment measure

Even if the markets are efficient, professional portfolio management is still important because it provides investors with:

1. Low cost diversification 2. A portfolio with a specified risk level

What are some characteristics of market efficiency?

1. There are no arbitrage opportunities 2. Security prices react quickly to new information 3. Active trading strategies will not consistently outperform passive strategies

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

Diversification

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news, which is a violation of what form of efficiency?

Strong form efficiency

Proponents of the EMH typically advocate

a passive investment strategy

The strong form of the EMH states that

all information, including inside information, must be reflected in the current stock price

The weak form of the EMH states that

all past information, including price and volume data must be reflected in the current stock price

The semistrong form of the EMH states that

all publicly available information must be reflected in the current stock price

In an efficient market, one might expect

an abnormal price change immediately after an announcement of high earnings

Proponents of the EMH think technical analysis

is a waste of time

The Fama French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that

either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

When the market risk premium rises, stock prices will

fall

Value stocks usually exhibit

low price-to-book ratios and low price-to-earnings ratios

Random price movements indicate

markets are functioning efficiently

The primary objective of fundamental analysis is to identify

mispriced stocks

Market anomaly

price behavior that differs from the behavior predicted by the efficient market hypothesis

Most evidence indicated that US stock markets are

reasonably weak-form and semistrong-form efficient

The term random walk is used in investments to refer to

stock price changes that are random and unpredictable

Choosing stocks by searing for predictable patterns in stock prices

technical analysis

The semistrong form of the efficient market hypothesis implies that __ generate abnormal returns and __ generate abnormal returns

technical analysis cannot; fundamental analysis cannot

An abnormal return

the return on a stock beyong what would be predicted from market movements alone

Evidence supporting semistrong form market efficiency suggests that investors should

use a passive trading strategy such as purchasing an index fund or an ETF