Podcast
Questions and Answers
What is the primary reason for the ban on profiting from non-public information in the U.S. stock markets?
What is the primary reason for the ban on profiting from non-public information in the U.S. stock markets?
- To increase stock prices
- To allow insiders to trade freely
- To protect corporate profits
- To ensure fairness and trust in the markets (correct)
Which of the following describes an informed trader?
Which of the following describes an informed trader?
- An investor who speculates without any information
- An investor who uses non-public information to trade
- An investor who is an insider in a corporation
- An investor who trades based on public information and analysis (correct)
What is required for company insiders to legally trade stocks of their own company?
What is required for company insiders to legally trade stocks of their own company?
- They can use any information without restriction
- They must gain permission from the company's board
- They must comply with SEC reporting rules (correct)
- They must not report their trades to anyone
Which statement is true regarding illegal insider trading?
Which statement is true regarding illegal insider trading?
What distinguishes legal insider trading from illegal insider trading?
What distinguishes legal insider trading from illegal insider trading?
Who is considered an 'insider' for the purpose of identifying illegal insider trading?
Who is considered an 'insider' for the purpose of identifying illegal insider trading?
Which source is NOT considered a common information source for informed traders?
Which source is NOT considered a common information source for informed traders?
What action can lead to charges of insider trading?
What action can lead to charges of insider trading?
What do researchers suggest about the predictability of future stock returns based on past returns?
What do researchers suggest about the predictability of future stock returns based on past returns?
What impact do trading costs have on attempts to build a profitable trading system based on past stock returns?
What impact do trading costs have on attempts to build a profitable trading system based on past stock returns?
How do stock price movements behave in terms of predictability?
How do stock price movements behave in terms of predictability?
What does the efficient market hypothesis (EMH) imply regarding stock prices and publicly available information?
What does the efficient market hypothesis (EMH) imply regarding stock prices and publicly available information?
What does the pattern of stock price changes resemble under the concept of a random walk?
What does the pattern of stock price changes resemble under the concept of a random walk?
In which way can stock prices adjust to unexpected news according to the efficient market reaction?
In which way can stock prices adjust to unexpected news according to the efficient market reaction?
What is a common misconception about stock market price predictability?
What is a common misconception about stock market price predictability?
Which statement correctly describes the relationship between historical price movements and future stock performance?
Which statement correctly describes the relationship between historical price movements and future stock performance?
What is the primary assertion of the efficient markets hypothesis (EMH)?
What is the primary assertion of the efficient markets hypothesis (EMH)?
What does a delayed reaction in stock prices imply?
What does a delayed reaction in stock prices imply?
What does 'beating the market' refer to?
What does 'beating the market' refer to?
What is the primary focus of researchers conducting event studies?
What is the primary focus of researchers conducting event studies?
Which of the following is a finding regarding professional money managers and market performance?
Which of the following is a finding regarding professional money managers and market performance?
Which of the following describes an abnormal return?
Which of the following describes an abnormal return?
Following the recall of Complete MoisturePlus Multi Purpose Solution, how much did EYE shares drop by on May 29, 2007?
Following the recall of Complete MoisturePlus Multi Purpose Solution, how much did EYE shares drop by on May 29, 2007?
What type of infection was linked to the contact lens solution by the CDC?
What type of infection was linked to the contact lens solution by the CDC?
What is one implication of market efficiency on individual investors?
What is one implication of market efficiency on individual investors?
How did Advanced Medical Optics respond to the link found by the CDC regarding their product?
How did Advanced Medical Optics respond to the link found by the CDC regarding their product?
Which phenomenon is mentioned as a potentially misleading occurrence in market performance?
Which phenomenon is mentioned as a potentially misleading occurrence in market performance?
What must researchers account for when analyzing effects of news on stock prices?
What must researchers account for when analyzing effects of news on stock prices?
What is a critical question raised about investors in the discussion of market efficiency?
What is a critical question raised about investors in the discussion of market efficiency?
What is likely a common misconception about stock price adjustments?
What is likely a common misconception about stock price adjustments?
According to market efficiency principles, which statement is likely true?
According to market efficiency principles, which statement is likely true?
What was the main reason the executives believed for the occurrences of AK infections?
What was the main reason the executives believed for the occurrences of AK infections?
What is the role of a tipper in illegal insider trading?
What is the role of a tipper in illegal insider trading?
Which statement accurately describes the difficulty faced by the SEC in prosecuting insider trading?
Which statement accurately describes the difficulty faced by the SEC in prosecuting insider trading?
What initiated Martha Stewart's illegal insider trading case?
What initiated Martha Stewart's illegal insider trading case?
What happened to the price of ImClone shares after the FDA rejection was announced?
What happened to the price of ImClone shares after the FDA rejection was announced?
Which was a key factor in the SEC's case against Martha Stewart?
Which was a key factor in the SEC's case against Martha Stewart?
What must the SEC demonstrate about a trader in cases of insider trading?
What must the SEC demonstrate about a trader in cases of insider trading?
What plea did Martha Stewart enter during her indictment?
What plea did Martha Stewart enter during her indictment?
When did Martha Stewart's trial begin?
When did Martha Stewart's trial begin?
What characterizes a bubble in the financial context?
What characterizes a bubble in the financial context?
Which effect is characterized by daily returns from the last day of a month and the following three days of the next month?
Which effect is characterized by daily returns from the last day of a month and the following three days of the next month?
During which period was the difference between 'Turn-of-the-Year' returns and 'Rest of the Days' returns the most significant?
During which period was the difference between 'Turn-of-the-Year' returns and 'Rest of the Days' returns the most significant?
What is associated with a crash in the market?
What is associated with a crash in the market?
Which event is considered the Crash of 1987?
Which event is considered the Crash of 1987?
What typically occurs after a bubble pops?
What typically occurs after a bubble pops?
How long do bubbles typically take to form?
How long do bubbles typically take to form?
What notable event happened on October 16, 1987?
What notable event happened on October 16, 1987?
What was the outcome of Martha Stewart's securities fraud charge?
What was the outcome of Martha Stewart's securities fraud charge?
What was the minimum sentence that Judge Cedarbaum could impose on Martha Stewart?
What was the minimum sentence that Judge Cedarbaum could impose on Martha Stewart?
What do researchers find about the predictability of short-term stock price movements?
What do researchers find about the predictability of short-term stock price movements?
What implication does market efficiency have on the roles of professional money managers?
What implication does market efficiency have on the roles of professional money managers?
What charge was Martha Stewart convicted of?
What charge was Martha Stewart convicted of?
What is one of the problems that make testing market efficiency difficult?
What is one of the problems that make testing market efficiency difficult?
Which of the following is NOT a reason why testing market efficiency is challenging?
Which of the following is NOT a reason why testing market efficiency is challenging?
What was the maximum fine that could be imposed on Martha Stewart by federal rules?
What was the maximum fine that could be imposed on Martha Stewart by federal rules?
What differentiates informed trading from insider trading?
What differentiates informed trading from insider trading?
What requirement must company insiders fulfill to legally trade their company's stock?
What requirement must company insiders fulfill to legally trade their company's stock?
What constitutes illegal insider trading?
What constitutes illegal insider trading?
What characterizes the 'Turn-of-the-Month' effect?
What characterizes the 'Turn-of-the-Month' effect?
Which of the following actions is not considered informed trading?
Which of the following actions is not considered informed trading?
During which time period was the 'Turn-of-the-Year' effect most pronounced?
During which time period was the 'Turn-of-the-Year' effect most pronounced?
What is a consequence of illegal insider trading for the markets?
What is a consequence of illegal insider trading for the markets?
What does the SEC's role in insider trading include?
What does the SEC's role in insider trading include?
What is a common consequence of a market bubble popping?
What is a common consequence of a market bubble popping?
What distinguishes a market crash from a bubble?
What distinguishes a market crash from a bubble?
Who can be classified as an 'insider' under insider trading laws?
Who can be classified as an 'insider' under insider trading laws?
What event is recognized as the beginning of the Crash of 1987?
What event is recognized as the beginning of the Crash of 1987?
What investment strategy offers an advantage against professional money managers?
What investment strategy offers an advantage against professional money managers?
Which circumstance would not classify as legal insider trading?
Which circumstance would not classify as legal insider trading?
What is indicated by the low and stable percentage of professional money managers beating the Vanguard 500 Index Fund over a 10-year investment period?
What is indicated by the low and stable percentage of professional money managers beating the Vanguard 500 Index Fund over a 10-year investment period?
What effect is generally evident in the stock market across various time periods?
What effect is generally evident in the stock market across various time periods?
In how many years between 1989 and 2018 did more than half of managed equity funds beat the Vanguard 500 Index Fund for a year?
In how many years between 1989 and 2018 did more than half of managed equity funds beat the Vanguard 500 Index Fund for a year?
What best describes a significant feature of a market crash?
What best describes a significant feature of a market crash?
What is a typical result of a stock market bubble forming?
What is a typical result of a stock market bubble forming?
What is a significant feature of the Vanguard 500 Index Fund?
What is a significant feature of the Vanguard 500 Index Fund?
What does the variation in the performance of actively managed equity funds compared to the Vanguard 500 Index Fund suggest?
What does the variation in the performance of actively managed equity funds compared to the Vanguard 500 Index Fund suggest?
What conclusion can be drawn from the percentage of managed equity funds beating the Vanguard 500 Index Fund over 10-year periods?
What conclusion can be drawn from the percentage of managed equity funds beating the Vanguard 500 Index Fund over 10-year periods?
Which mutual fund is specifically mentioned as an example of a broad-based market index fund?
Which mutual fund is specifically mentioned as an example of a broad-based market index fund?
What does the term 'market index' refer to in the context of investing?
What does the term 'market index' refer to in the context of investing?
What opportunity does Starbucks offer to its employees regarding company stock?
What opportunity does Starbucks offer to its employees regarding company stock?
Which phenomenon describes the tendency for Mondays to have negative average returns?
Which phenomenon describes the tendency for Mondays to have negative average returns?
What is a characteristic of many market anomalies?
What is a characteristic of many market anomalies?
What does the January effect predominantly relate to?
What does the January effect predominantly relate to?
The Turn-of-the-Year Effect studies returns during which time frame?
The Turn-of-the-Year Effect studies returns during which time frame?
Which time periods show a stronger Day-of-the-Week Effect according to the information provided?
Which time periods show a stronger Day-of-the-Week Effect according to the information provided?
What is one reason why market anomalies are difficult to exploit for profit?
What is one reason why market anomalies are difficult to exploit for profit?
What does the analysis of small-cap stock returns in January examine?
What does the analysis of small-cap stock returns in January examine?
Which of the following concepts best describes the efficient markets hypothesis (EMH)?
Which of the following concepts best describes the efficient markets hypothesis (EMH)?
What is the primary implication of market efficiency for professional money managers?
What is the primary implication of market efficiency for professional money managers?
What does 'beating the market' generally mean in investment terms?
What does 'beating the market' generally mean in investment terms?
Which of the following best characterizes stock market anomalies?
Which of the following best characterizes stock market anomalies?
Which of the following statements reflects the challenge faced by investors regarding market efficiency?
Which of the following statements reflects the challenge faced by investors regarding market efficiency?
What role do economic forces play in market efficiency?
What role do economic forces play in market efficiency?
Which of the following phenomena is noted as an intriguing market occurrence?
Which of the following phenomena is noted as an intriguing market occurrence?
Which of the following statements about stock price behavior is likely true?
Which of the following statements about stock price behavior is likely true?
What is the implication of rational investors in a market context?
What is the implication of rational investors in a market context?
Under what condition is a market categorized as weak-form efficient?
Under what condition is a market categorized as weak-form efficient?
What primarily drives market efficiency according to the content?
What primarily drives market efficiency according to the content?
What does a strong-form efficient market indicate?
What does a strong-form efficient market indicate?
What might occur if collective irrationality does not balance out?
What might occur if collective irrationality does not balance out?
What is typically a minimal performance enhancement worth to a large fund?
What is typically a minimal performance enhancement worth to a large fund?
What is a common misconception about old information in the context of market efficiency?
What is a common misconception about old information in the context of market efficiency?
What characterizes irrational investors in a market setting?
What characterizes irrational investors in a market setting?
What does delayed reaction in stock prices indicate?
What does delayed reaction in stock prices indicate?
How did Advanced Medical Optics respond to the CDC's findings regarding their contact lens solution?
How did Advanced Medical Optics respond to the CDC's findings regarding their contact lens solution?
Which of the following best describes overreaction and correction in stock price behavior?
Which of the following best describes overreaction and correction in stock price behavior?
What is a primary focus of event studies in the context of stock prices?
What is a primary focus of event studies in the context of stock prices?
What must researchers consider when analyzing the effects of news on stock prices?
What must researchers consider when analyzing the effects of news on stock prices?
What was the opening price of Advanced Medical Optics shares on May 29, 2007?
What was the opening price of Advanced Medical Optics shares on May 29, 2007?
What type of method do researchers use to measure the impact of new information on stock prices?
What type of method do researchers use to measure the impact of new information on stock prices?
Which infection was linked to Advanced Medical Optics' contact lens solution by the CDC?
Which infection was linked to Advanced Medical Optics' contact lens solution by the CDC?
What distinguishes informed trading from insider trading?
What distinguishes informed trading from insider trading?
Which of the following is necessary for trades made by company insiders to be considered legal?
Which of the following is necessary for trades made by company insiders to be considered legal?
What could be considered as material non-public information for an insider?
What could be considered as material non-public information for an insider?
What is a potential consequence if investors were allowed to trade based on non-public information?
What is a potential consequence if investors were allowed to trade based on non-public information?
Which of the following statements accurately describes legal insider trading?
Which of the following statements accurately describes legal insider trading?
What defines an 'insider' in the context of illegal trading?
What defines an 'insider' in the context of illegal trading?
Why is the ban on profiting from non-public information considered necessary for stock market integrity?
Why is the ban on profiting from non-public information considered necessary for stock market integrity?
What is the role of the SEC in relation to insider trading?
What is the role of the SEC in relation to insider trading?
What percentage of the time did half of the professionally managed funds outperform the Vanguard 500 Index Fund?
What percentage of the time did half of the professionally managed funds outperform the Vanguard 500 Index Fund?
What key issue is raised regarding mutual fund managers in the context of efficient markets?
What key issue is raised regarding mutual fund managers in the context of efficient markets?
What is a primary role of a portfolio manager in an efficient market?
What is a primary role of a portfolio manager in an efficient market?
What does survivorship bias refer to in the context of professional money managers?
What does survivorship bias refer to in the context of professional money managers?
Which factors influence the choice of an optimal portfolio for an investor?
Which factors influence the choice of an optimal portfolio for an investor?
What implication does the ability to beat the market have for individual investors?
What implication does the ability to beat the market have for individual investors?
Why is the performance of professional money managers considered troubling?
Why is the performance of professional money managers considered troubling?
During which investment period was most data on money managers' performance analyzed?
During which investment period was most data on money managers' performance analyzed?
What characterizes the 'Turn-of-the-Month' effect in stock market returns?
What characterizes the 'Turn-of-the-Month' effect in stock market returns?
Which statement best explains the nature of investment bubbles?
Which statement best explains the nature of investment bubbles?
What is the typical duration of a market crash?
What is the typical duration of a market crash?
During which period was the 'Turn-of-the-Year' effect notably observed?
During which period was the 'Turn-of-the-Year' effect notably observed?
What was the impact of the 'Turn-of-the-Month' effect on stock returns?
What was the impact of the 'Turn-of-the-Month' effect on stock returns?
What defines a market crash in contrast to a bubble?
What defines a market crash in contrast to a bubble?
Which event marked a significant drop in the DJIA on October 19, 1987?
Which event marked a significant drop in the DJIA on October 19, 1987?
How are the effects of a market crash characterized after the initial plunge?
How are the effects of a market crash characterized after the initial plunge?
What happens when the S&P 500 index falls 13% before 3:25 p.m.?
What happens when the S&P 500 index falls 13% before 3:25 p.m.?
Which of the following best describes the market conditions before the Asian Crash?
Which of the following best describes the market conditions before the Asian Crash?
What was a key issue that contributed to the failures of many DotComs during the bubble?
What was a key issue that contributed to the failures of many DotComs during the bubble?
What characteristic defines Level 3 circuit breakers?
What characteristic defines Level 3 circuit breakers?
How did the Crash of 1987 affect market infrastructure?
How did the Crash of 1987 affect market infrastructure?
What triggered strong investor interest in the 'new economy' during the mid-1990s?
What triggered strong investor interest in the 'new economy' during the mid-1990s?
How do investors typically react to market crashes, such as the Crash of 1929 and the Asian Crash?
How do investors typically react to market crashes, such as the Crash of 1929 and the Asian Crash?
Which of the following describes the typical response of trading halts during a significant market decline?
Which of the following describes the typical response of trading halts during a significant market decline?
What occurs when irrational investors in a market have different beliefs?
What occurs when irrational investors in a market have different beliefs?
Why is it difficult to earn an excess return in a perfectly rational market?
Why is it difficult to earn an excess return in a perfectly rational market?
In a weak-form efficient market, which investment strategy is least effective?
In a weak-form efficient market, which investment strategy is least effective?
What drives the competition that leads to market efficiency?
What drives the competition that leads to market efficiency?
What characterizes a strong-form efficient market?
What characterizes a strong-form efficient market?
What might happen if collective irrationality does not balance out in the market?
What might happen if collective irrationality does not balance out in the market?
What is a key implication of market efficiency regarding old information?
What is a key implication of market efficiency regarding old information?
What does the profit potential in an efficient market create incentives for?
What does the profit potential in an efficient market create incentives for?
What is the formula for calculating abnormal return?
What is the formula for calculating abnormal return?
How is the expected return typically calculated?
How is the expected return typically calculated?
What value is assigned to the day of the news announcement in the abnormal returns calculation?
What value is assigned to the day of the news announcement in the abnormal returns calculation?
What was the maximum fine imposed on Martha Stewart by Judge Cedarbaum?
What was the maximum fine imposed on Martha Stewart by Judge Cedarbaum?
What do cumulative abnormal returns (CAR) indicate after an announcement?
What do cumulative abnormal returns (CAR) indicate after an announcement?
Which type of crime was Martha Stewart convicted of?
Which type of crime was Martha Stewart convicted of?
What implication does market efficiency suggest regarding the role of professional money managers?
What implication does market efficiency suggest regarding the role of professional money managers?
What pattern is expected according to the Efficient Market Hypothesis (EMH) in the context of cumulative abnormal returns?
What pattern is expected according to the Efficient Market Hypothesis (EMH) in the context of cumulative abnormal returns?
What is a reason that makes testing market efficiency challenging?
What is a reason that makes testing market efficiency challenging?
What does it mean if a market is strong-form efficient?
What does it mean if a market is strong-form efficient?
What is typically the time frame for accumulating abnormal returns in event studies?
What is typically the time frame for accumulating abnormal returns in event studies?
How did the market react to new information according to general findings about market efficiency?
How did the market react to new information according to general findings about market efficiency?
What is the significance of observing a sharp downward movement in cumulative abnormal returns after an announcement?
What is the significance of observing a sharp downward movement in cumulative abnormal returns after an announcement?
What is a consequence of market efficiency on security selection?
What is a consequence of market efficiency on security selection?
What was the fine imposed on Peter Bacanovic, Martha Stewart's broker?
What was the fine imposed on Peter Bacanovic, Martha Stewart's broker?
Who is the person that discloses material non-public information in an illegal insider trading scenario?
Who is the person that discloses material non-public information in an illegal insider trading scenario?
What is the challenge faced by the SEC in proving insider trading cases?
What is the challenge faced by the SEC in proving insider trading cases?
What must the SEC prove regarding the trader's awareness in insider trading cases?
What must the SEC prove regarding the trader's awareness in insider trading cases?
What was the significant information that Martha Stewart was allegedly tipped off about?
What was the significant information that Martha Stewart was allegedly tipped off about?
What action did Martha Stewart take on December 27, 2001, regarding her shares in ImClone?
What action did Martha Stewart take on December 27, 2001, regarding her shares in ImClone?
What triggered Martha Stewart's stop-loss order on her ImClone shares?
What triggered Martha Stewart's stop-loss order on her ImClone shares?
What was the closing price of ImClone shares the Monday after the FDA rejection news was made public?
What was the closing price of ImClone shares the Monday after the FDA rejection news was made public?
What was Martha Stewart's plea during her indictment in June 2003?
What was Martha Stewart's plea during her indictment in June 2003?
What is a characteristic of informed trading?
What is a characteristic of informed trading?
Which action distinguishes legal insider trading from illegal insider trading?
Which action distinguishes legal insider trading from illegal insider trading?
What constitutes an 'insider' in the context of illegal insider trading?
What constitutes an 'insider' in the context of illegal insider trading?
Which of the following best describes the need for a ban on profits from non-public information?
Which of the following best describes the need for a ban on profits from non-public information?
What is a common misconception about insider trading?
What is a common misconception about insider trading?
Which activities are considered illegal insider trading?
Which activities are considered illegal insider trading?
Why are SEC regulations critical to insider trading practices?
Why are SEC regulations critical to insider trading practices?
What defines the 'Turn of the Month Days'?
What defines the 'Turn of the Month Days'?
What was significant about the Crash of 1987 regarding the DJIA?
What was significant about the Crash of 1987 regarding the DJIA?
Which period demonstrated the greatest difference between 'Turn-of-the-Year' returns and 'Rest of the Days' returns?
Which period demonstrated the greatest difference between 'Turn-of-the-Year' returns and 'Rest of the Days' returns?
How long do market crashes typically last?
How long do market crashes typically last?
Which statement best describes the characteristics of a bubble?
Which statement best describes the characteristics of a bubble?
What is a common feature of the 'Turn-of-the-Month' effect?
What is a common feature of the 'Turn-of-the-Month' effect?
During which event did the DJIA lose about 22.6% of its value on a single day?
During which event did the DJIA lose about 22.6% of its value on a single day?
What is the primary connection between bubbles and crashes in the stock market?
What is the primary connection between bubbles and crashes in the stock market?
Which statement accurately describes the Constant Perpetual Growth Model?
Which statement accurately describes the Constant Perpetual Growth Model?
What is a major limitation of the Two-Stage Dividend Growth Model?
What is a major limitation of the Two-Stage Dividend Growth Model?
Which aspect of the Residual Income Model (RIM) is crucial for its calculation?
Which aspect of the Residual Income Model (RIM) is crucial for its calculation?
What challenge do analysts face when estimating parameters in the models discussed?
What challenge do analysts face when estimating parameters in the models discussed?
What does the Clean Surplus Relationship (CSR) suggest about a company's financial activities?
What does the Clean Surplus Relationship (CSR) suggest about a company's financial activities?
What is the formula used for valuing a stock under the constant growth rate model when the growth rate does not equal the discount rate?
What is the formula used for valuing a stock under the constant growth rate model when the growth rate does not equal the discount rate?
If the current dividend is $10, the growth rate is 10%, and the discount rate is 8%, what is the estimated value of the stock?
If the current dividend is $10, the growth rate is 10%, and the discount rate is 8%, what is the estimated value of the stock?
Under the constant perpetual growth model, what condition must be satisfied for the formula $P_0 = D_1 / (k - g)$ to be valid?
Under the constant perpetual growth model, what condition must be satisfied for the formula $P_0 = D_1 / (k - g)$ to be valid?
What is the primary purpose of using historical average growth rates in estimating future dividend growth?
What is the primary purpose of using historical average growth rates in estimating future dividend growth?
If a company offers a dividend of $3.78 with a growth rate of 2% and a discount rate of 5%, what would be the value of the stock using the constant perpetual growth model?
If a company offers a dividend of $3.78 with a growth rate of 2% and a discount rate of 5%, what would be the value of the stock using the constant perpetual growth model?
Which of the following components is not part of the Dividend Discount Model (DDM) for estimating stock values?
Which of the following components is not part of the Dividend Discount Model (DDM) for estimating stock values?
What happens to the estimated stock value when the growth rate approaches the discount rate in the DDM?
What happens to the estimated stock value when the growth rate approaches the discount rate in the DDM?
In the constant growth rate model, what signifies that dividends will grow at a constant rate?
In the constant growth rate model, what signifies that dividends will grow at a constant rate?
Which of the following factors can cause a company to have negative earnings while still maintaining positive cash flows?
Which of the following factors can cause a company to have negative earnings while still maintaining positive cash flows?
In the formula for Free Cash Flow (FCF), what does the term 'Capital Spending' refer to?
In the formula for Free Cash Flow (FCF), what does the term 'Capital Spending' refer to?
What differentiates the Dividend Discount Model (DDM) from the Free Cash Flow (FCF) model in terms of value calculation?
What differentiates the Dividend Discount Model (DDM) from the Free Cash Flow (FCF) model in terms of value calculation?
Which of the following statements is true regarding asset betas?
Which of the following statements is true regarding asset betas?
What effect does depreciation have on reported earnings?
What effect does depreciation have on reported earnings?
When can a company report positive EBIT while still having negative Free Cash Flow?
When can a company report positive EBIT while still having negative Free Cash Flow?
How do cash flows differ from net income in the context of companies with different depreciation methods?
How do cash flows differ from net income in the context of companies with different depreciation methods?
Which component is not included in the calculation of Free Cash Flow (FCF)?
Which component is not included in the calculation of Free Cash Flow (FCF)?
What is the estimated CAPM discount rate for CVS based on the given rates?
What is the estimated CAPM discount rate for CVS based on the given rates?
How is the retention ratio for CVS calculated?
How is the retention ratio for CVS calculated?
What is CVS's sustainable growth rate derived from the retention ratio and ROE?
What is CVS's sustainable growth rate derived from the retention ratio and ROE?
Which valuation method produces the highest estimated stock price for CVS?
Which valuation method produces the highest estimated stock price for CVS?
What is the value obtained from the Dividend Discount Model (DDM) using analyst forecasted growth rate?
What is the value obtained from the Dividend Discount Model (DDM) using analyst forecasted growth rate?
Which two-stage model price estimate is listed for CVS?
Which two-stage model price estimate is listed for CVS?
What percentage is the retention ratio calculated for CVS?
What percentage is the retention ratio calculated for CVS?
What insight is provided regarding the range of share values estimated by various models?
What insight is provided regarding the range of share values estimated by various models?
What is the primary result of converting reported equity betas into asset betas?
What is the primary result of converting reported equity betas into asset betas?
If a firm has no debt, what is the relationship between equity beta and asset beta?
If a firm has no debt, what is the relationship between equity beta and asset beta?
Which input is NOT required to calculate the value of a firm using the FCF approach?
Which input is NOT required to calculate the value of a firm using the FCF approach?
What formula is used to calculate the proper discount rate for Landon Air?
What formula is used to calculate the proper discount rate for Landon Air?
What is the effect of a high P/E ratio on a company’s stock classification?
What is the effect of a high P/E ratio on a company’s stock classification?
What does the conversion of asset beta to equity beta account for when a company has debt?
What does the conversion of asset beta to equity beta account for when a company has debt?
In the example provided, what is Landon Air's estimated asset beta based on its equity beta and leverage?
In the example provided, what is Landon Air's estimated asset beta based on its equity beta and leverage?
What does the earnings yield represent in relation to the P/E ratio?
What does the earnings yield represent in relation to the P/E ratio?
What is the primary focus of the Dividend Discount Model (DDM)?
What is the primary focus of the Dividend Discount Model (DDM)?
Which of the following is NOT one of the four categories commonly used to assess the economic value of common stocks?
Which of the following is NOT one of the four categories commonly used to assess the economic value of common stocks?
In the equation of the Dividend Discount Model, what does 'k' represent?
In the equation of the Dividend Discount Model, what does 'k' represent?
What is the basic purpose of fundamental analysis in stock valuation?
What is the basic purpose of fundamental analysis in stock valuation?
Which statement accurately reflects a common risk faced when using the Dividend Discount Model?
Which statement accurately reflects a common risk faced when using the Dividend Discount Model?
What does the term 'undervalued stocks' mean in the context of stock analysis?
What does the term 'undervalued stocks' mean in the context of stock analysis?
In the context of stock valuation methods, what is the Free Cash Flow model primarily based on?
In the context of stock valuation methods, what is the Free Cash Flow model primarily based on?
Which valuation method incorporates growth rates into the expected future dividend payments?
Which valuation method incorporates growth rates into the expected future dividend payments?
Flashcards
Market Efficiency
Market Efficiency
A theory that argues financial markets reflect all available information at any given time.
Efficient Markets Hypothesis (EMH)
Efficient Markets Hypothesis (EMH)
Theory suggesting that markets reflect all available information.
Abnormal Return
Abnormal Return
Investment return exceeding the returns of similar-risk investments.
"Beating the Market"
"Beating the Market"
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Market Efficiency research
Market Efficiency research
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Rational Investors
Rational Investors
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Professional Money Managers
Professional Money Managers
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Stock Market Anomalies
Stock Market Anomalies
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Predictability of stock prices
Predictability of stock prices
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Random Walk Hypothesis
Random Walk Hypothesis
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Semi-strong EMH
Semi-strong EMH
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Efficient Market Reaction (EMR)
Efficient Market Reaction (EMR)
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Technical Analysis Limitations
Technical Analysis Limitations
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Trading costs in stock markets
Trading costs in stock markets
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Stock price changes and new information
Stock price changes and new information
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Delayed Reaction
Delayed Reaction
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Overreaction and Correction
Overreaction and Correction
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Event Study
Event Study
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What is the purpose of event studies?
What is the purpose of event studies?
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What happened to Advanced Medical Optics (EYE) stock after the recall?
What happened to Advanced Medical Optics (EYE) stock after the recall?
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Why do researchers consider overall market news in event studies?
Why do researchers consider overall market news in event studies?
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How were the occurrences of AK (Acanthamoeba keratitis) related to the recall?
How were the occurrences of AK (Acanthamoeba keratitis) related to the recall?
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What was the reason behind Advanced Medical Optics's recall?
What was the reason behind Advanced Medical Optics's recall?
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Informed Trading
Informed Trading
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Insider Trading
Insider Trading
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Legal Insider Trading
Legal Insider Trading
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Illegal Insider Trading
Illegal Insider Trading
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Material Non-Public Information
Material Non-Public Information
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Who is an Insider?
Who is an Insider?
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What is the SEC?
What is the SEC?
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Why is Insider Trading Illegal?
Why is Insider Trading Illegal?
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Tippee
Tippee
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Tipper
Tipper
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Martha Stewart Case
Martha Stewart Case
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Material Non-Public Information (MNPI)
Material Non-Public Information (MNPI)
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SEC (Securities and Exchange Commission)
SEC (Securities and Exchange Commission)
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Stop-Loss Order
Stop-Loss Order
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FDA (Food and Drug Administration)
FDA (Food and Drug Administration)
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Turn-of-the-Year Effect
Turn-of-the-Year Effect
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Turn-of-the-Month Effect
Turn-of-the-Month Effect
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What puzzles EMH proponents?
What puzzles EMH proponents?
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Investment Bubble
Investment Bubble
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What happens when a bubble pops?
What happens when a bubble pops?
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Market Crash
Market Crash
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Crash of 1929
Crash of 1929
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Crash of 1987
Crash of 1987
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What are the implications of market efficiency for investors?
What are the implications of market efficiency for investors?
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What are some forces driving market efficiency?
What are some forces driving market efficiency?
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What are stock market anomalies?
What are stock market anomalies?
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What are some examples of stock market anomalies?
What are some examples of stock market anomalies?
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What are investment bubbles and market crashes?
What are investment bubbles and market crashes?
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What does the occurrence of bubbles and crashes suggest about market efficiency?
What does the occurrence of bubbles and crashes suggest about market efficiency?
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Vanguard 500 Index Fund
Vanguard 500 Index Fund
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Beat the Market
Beat the Market
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10-Year Investment Period
10-Year Investment Period
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Market Efficiency & Professional Investors
Market Efficiency & Professional Investors
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Percentage of Funds Beating the Index
Percentage of Funds Beating the Index
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Martha Stewart's Conviction
Martha Stewart's Conviction
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Market Efficiency: Difficult to Test
Market Efficiency: Difficult to Test
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Market Efficiency: Short-Term Prediction
Market Efficiency: Short-Term Prediction
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Market Efficiency: Reactions to New Information
Market Efficiency: Reactions to New Information
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Market Efficiency: Beating the Market
Market Efficiency: Beating the Market
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Market Efficiency: Implications for Security Selection
Market Efficiency: Implications for Security Selection
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Market Efficiency: Implications for Money Managers
Market Efficiency: Implications for Money Managers
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Market Efficiency: Implications for Market Timing
Market Efficiency: Implications for Market Timing
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Day-of-the-Week Effect
Day-of-the-Week Effect
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January Effect
January Effect
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Market Anomalies
Market Anomalies
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What are the characteristics of anomalies?
What are the characteristics of anomalies?
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What is the significance of the January effect?
What is the significance of the January effect?
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How does the Day-of-the-Week effect challenge the Efficient Market Hypothesis?
How does the Day-of-the-Week effect challenge the Efficient Market Hypothesis?
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What is the Turn-of-the-Month Effect?
What is the Turn-of-the-Month Effect?
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Weak-form Efficiency
Weak-form Efficiency
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Semi-strong Efficiency
Semi-strong Efficiency
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Strong-form Efficiency
Strong-form Efficiency
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Arbitrage
Arbitrage
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Professional Investor Performance
Professional Investor Performance
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Survivorship Bias
Survivorship Bias
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Portfolio Manager's Role in Efficient Market
Portfolio Manager's Role in Efficient Market
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Why Funds Don't Beat the Index?
Why Funds Don't Beat the Index?
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Market Efficiency and Information
Market Efficiency and Information
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The Role of Portfolio Diversification
The Role of Portfolio Diversification
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Factors Affecting Portfolio Choice
Factors Affecting Portfolio Choice
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Market Efficiency: A Challenging Concept
Market Efficiency: A Challenging Concept
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Circuit Breakers
Circuit Breakers
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Level 1 Circuit Breaker
Level 1 Circuit Breaker
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Level 2 Circuit Breaker
Level 2 Circuit Breaker
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Level 3 Circuit Breaker
Level 3 Circuit Breaker
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Asian Crash (1990s)
Asian Crash (1990s)
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Dot-Com Bubble (1990s)
Dot-Com Bubble (1990s)
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Crash of 2008
Crash of 2008
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Nikkei 225 Index
Nikkei 225 Index
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Cumulative Abnormal Return (CAR)
Cumulative Abnormal Return (CAR)
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What makes testing market efficiency difficult?
What makes testing market efficiency difficult?
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Market Efficiency: Implications for Investors
Market Efficiency: Implications for Investors
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What is the Day-of-the-Week Effect?
What is the Day-of-the-Week Effect?
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The Crash of 1929
The Crash of 1929
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The Crash of 1987
The Crash of 1987
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Dividend Discount Model (DDM)
Dividend Discount Model (DDM)
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Risk-Adjusted Discount Rate (k)
Risk-Adjusted Discount Rate (k)
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Two-Stage Dividend Growth Model
Two-Stage Dividend Growth Model
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Residual Income Model
Residual Income Model
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Free Cash Flow Model
Free Cash Flow Model
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Price Ratio Analysis
Price Ratio Analysis
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Fundamental Analysis
Fundamental Analysis
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Constant Growth Rate Model
Constant Growth Rate Model
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Constant Perpetual Growth Model
Constant Perpetual Growth Model
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Estimating the Growth Rate (g)
Estimating the Growth Rate (g)
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Discount Rate (k)
Discount Rate (k)
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Intrinsic Value
Intrinsic Value
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DDM Formula (Constant Growth)
DDM Formula (Constant Growth)
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DDM Formula (Constant Perpetual)
DDM Formula (Constant Perpetual)
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Residual Income Model (RIM)
Residual Income Model (RIM)
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Clean Surplus Relationship (CSR)
Clean Surplus Relationship (CSR)
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What is EVA (Economic Value Added)?
What is EVA (Economic Value Added)?
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CAPM
CAPM
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Risk Premium
Risk Premium
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Retention Ratio
Retention Ratio
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Sustainable Growth Rate (g)
Sustainable Growth Rate (g)
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Free Cash Flow (FCF)
Free Cash Flow (FCF)
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Price-Earnings Ratio (P/E)
Price-Earnings Ratio (P/E)
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Price-Sales Ratio (P/S)
Price-Sales Ratio (P/S)
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Asset Beta
Asset Beta
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Equity Beta
Equity Beta
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Convert Beta to Asset Beta
Convert Beta to Asset Beta
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How do you convert a company's equity beta to its asset beta?
How do you convert a company's equity beta to its asset beta?
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What is the formula for valuing a company using FCF?
What is the formula for valuing a company using FCF?
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Growth Rate of Free Cash Flow
Growth Rate of Free Cash Flow
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Depreciation in FCF
Depreciation in FCF
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How can a company have negative earnings and positive FCF?
How can a company have negative earnings and positive FCF?
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FCF Formula
FCF Formula
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DDM vs. FCF Model
DDM vs. FCF Model
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Why is Asset Beta important?
Why is Asset Beta important?
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How does debt affect equity beta?
How does debt affect equity beta?
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Study Notes
Chapter 7: Stock Price Behavior and Market Efficiency
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A market is the combined behavior of thousands of people responding to information, misinformation, and whim.
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"If you want to know what's happening in the market, ask the market." - Japanese proverb
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The efficient markets hypothesis (EMH) is a theory stating that major financial markets reflect all relevant information at a given time.
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Market efficiency research examines the relationship between stock prices and available information, the important question is: is it possible for investors to "beat the market?"
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Prediction of the efficient market hypothesis: if a market is efficient, it is not possible to consistently "beat the market."
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Abnormal return on an investment is the return in excess of that earned by other investments with the same risk.
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"Beating the market" means consistently earning a positive abnormal return.
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Investors use their information rationally, not systematically overvaluing or undervaluing financial assets.
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If every investor makes perfectly rational investment decisions, earning an excess return is difficult.
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There are independent deviations from rationality.
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Irrationality cancels out; the important issue is that irrational investors have differing beliefs; arbitrage exists.
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A weak-form efficient market uses past prices and volume as no use in beating the market and so technical analysis is of little use.
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A semistrong-form efficient market uses publicly available information, fundamental analysis is of little use in this form.
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A strong-form efficient market uses information of any kind (public or private) and "inside information" is of little use.
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The driving force toward market efficiency is simply competition and the profit motive.
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Even a relatively small performance enhancement can be worth a tremendous amount (when multiplied by the dollar involved).
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Profit potential creates incentives to unearth relevant information and use it.
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This question is surprisingly difficult to answer clearly.
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Researchers have used sophisticated techniques to test whether past stock-price movements help predict future stock-price movements.
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Future returns are partly predictable by past returns.
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Trading costs swamp attempts to build profitable trading systems built on past returns.
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No matter how often a particular stock price path has related to subsequent stock-price changes in the past, there is no assurance that this relationship will occur again in the future.
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Stock prices change when traders buy and sell shares based on their view of the future stock prospects.
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Unexpected new announcements influence the prospects for the stock.
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Prices could adjust to unexpected news in three basic ways:
- Efficient market reaction: The price instantaneously adjusts to the new information.
- Delayed reaction: The price partially adjusts to the new information.
- Overreaction and correction: The price over-adjusts to the new information but eventually falls to the appropriate price
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Researchers have examined the effects of many types of news announcements on stock prices in the intent to learn more about the adjustment process itself and the size of the stock price reaction
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To test the effects of new information on stock prices, researchers use something called an event study.
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Executives of Advanced Medical Optics, Inc. (EYE), voluntarily recalled a contact lens solution due to a link between the solution and a rare cornea infection called acanthamoeba keratitis (AK).
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In the U.S., it's illegal to make profits from non-public information to protect investor trust in markets; the SEC enforces the laws.
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An insider is someone who has material non-public information.
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When an illegal insider trade occurs, there is a tipper (divulges material non-public information) and a tippee (knowingly uses it to profit); It is difficult for the SEC to prove a trader is truly a tippee (Information flows are difficult to track; sometimes people are accused of insider trading but merely "overheard" conversations).
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The SEC believed that Martha Stewart sold ImClone shares after being told of the bad news, in advance of this news's public release.
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In June 2003, Ms. Stewart and her stock broker, Peter Bacanovic, were indicted; they both pled not guilty.
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Ms. Stewart's trial began in January 2004. Days before the deliberations, Judge Miriam Cedarbaum dismissed the most serious charge of securities fraud, although Ms. Stewart was convicted on four counts of obstructing justice.
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Judge Cedarbaum fined Ms. Stewart $30,000 and sentenced her to five months in prison, two years of probation, and five months of home confinement.
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Financial markets are the most extensively documented human endeavors, with colossal amounts of financial market data collected and reported every day.
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Market efficiency is difficult to test for four basic reasons: the risk-adjustment problem, the relevant information problem, the dumb luck problem, and the data snooping problem.
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Short-term stock price and market movements are difficult to predict with accuracy.
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The market quickly reacts to new information; studies show little evidence that such reactions can be profitably exploited.
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If a stock market can be beaten, the way to do it is not obvious.
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Security selection becomes less important because securities are fairly priced.
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A small role is left for professional money managers when the market is efficient.
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Timing the market makes little sense.
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The role of a portfolio manager is to build a portfolio to meet the specific needs of individual investors, often emphasizing a well-diversified portfolio.
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Tax brackets, risk aversion, age, and employer can influence portfolio choices.
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Market anomalies generally do not involve large sums of money in the overall market.
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They're often fleeting and disappear quickly; difficult to use as a trading strategy because of transaction costs.
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The day-of-the-week effect refers to Mondays' tendency to have a negative average return.
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The January effect shows small-cap stocks having heightened returns in January.
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The turn-of-the-year and turn-of-the-month effects exhibit similar patterns of returns (turn-of-month returns exceed "rest of the days" returns).
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A bubble is when prices soar beyond normal analysis, eventually popping.
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Crashes are significant and sudden market drops, often linked to bubbles resulting in plummeting asset values.
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Crashes are typically under a week but have lasting financial aftermath that can stretch on for years.
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The crash of 1929 is an example of a significant crash and the crash of 1987 was a similar example of a dramatic crash.
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The Asian crash of 1990 resulted in a long bear market following.
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The "Dot-Com" bubble and crash are another example of a crash; the crash of October 2008 is a possible example of a significant, market-moving crash.
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Circuit breakers are used to avoid market crashes and are designed to halt trading when the S&P 500 index experiences an excessive drop.
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Explore the concepts of market efficiency and stock price behavior in this quiz based on Chapter 7. Delve into theories like the efficient markets hypothesis and understand how investors respond to information. Can you grasp the dynamics of market predictions and the possibility of beating the market?
