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Questions and Answers
What is the primary characteristic of an efficient capital market?
What is the primary characteristic of an efficient capital market?
- Rapid adjustment of security prices to new information (correct)
- Slow adjustment of security prices
- Price manipulation by investors
- Inconsistent adjustment of security prices
What does 'beating the market' refer to in the context of market efficiency research?
What does 'beating the market' refer to in the context of market efficiency research?
- Consistently earning a positive excess return on investments (correct)
- Achieving a negative excess return on investments
- Being indifferent to market performance
- The inability to earn any return on investments
What does the efficient market hypothesis (EMH) predict about beating the market?
What does the efficient market hypothesis (EMH) predict about beating the market?
- It is only possible to beat the market in bear markets
- Beating the market has no relevance in an efficient market
- It is always possible to beat the market
- It is never possible to beat the market except by luck (correct)
What is the importance of competition among investors in an efficient capital market?
What is the importance of competition among investors in an efficient capital market?
What is the primary reason for rapid price adjustment in an informationally efficient market?
What is the primary reason for rapid price adjustment in an informationally efficient market?
What does 'alpha' refer to in the context of 'beating the market'?
What does 'alpha' refer to in the context of 'beating the market'?
What does the excess return on an investment represent?
What does the excess return on an investment represent?
What does the efficient market hypothesis (EMH) predict about the possibility of 'beating the market'?
What does the efficient market hypothesis (EMH) predict about the possibility of 'beating the market'?
What are the assumptions that imply an informationally efficient market?
What are the assumptions that imply an informationally efficient market?
What does the prediction of the efficient market hypothesis (EMH) suggest about capital markets?
What does the prediction of the efficient market hypothesis (EMH) suggest about capital markets?
According to the text, which type of market efficiency suggests that all publicly available information is fully reflected in current prices, making it unlikely that fundamental analysis can outperform the market?
According to the text, which type of market efficiency suggests that all publicly available information is fully reflected in current prices, making it unlikely that fundamental analysis can outperform the market?
What type of analysis focuses on patterns and trends in historical price and volume data to predict future price movements?
What type of analysis focuses on patterns and trends in historical price and volume data to predict future price movements?
Which form of market efficiency implies that historical price and volume data are of no use in beating the market, making technical analysis useless?
Which form of market efficiency implies that historical price and volume data are of no use in beating the market, making technical analysis useless?
What type of analysis assesses the intrinsic value of an asset based on financial statements, economic indicators, and company news?
What type of analysis assesses the intrinsic value of an asset based on financial statements, economic indicators, and company news?
According to the text, what do tests for market hypotheses include?
According to the text, what do tests for market hypotheses include?
What is the assumption underlying technical analysis as mentioned in the text?
What is the assumption underlying technical analysis as mentioned in the text?
According to the text, what does strong-form market efficiency assume?
According to the text, what does strong-form market efficiency assume?
According to the text, what type of trading strategies based on technical indicators might achieve some success, especially in volatile markets?
According to the text, what type of trading strategies based on technical indicators might achieve some success, especially in volatile markets?
What do event studies reveal according to the text?
What do event studies reveal according to the text?
What do random walk tests show according to the text?
What do random walk tests show according to the text?
According to the Weak Form Efficient Market Hypothesis, stock prices move like:
According to the Weak Form Efficient Market Hypothesis, stock prices move like:
Which form of the Efficient Market Hypothesis claims that stock prices reflect all information, even private?
Which form of the Efficient Market Hypothesis claims that stock prices reflect all information, even private?
What is an anomaly in the context of the Efficient Market Hypothesis?
What is an anomaly in the context of the Efficient Market Hypothesis?
Which group seems to benefit from private information, according to tests of the Strong Form EMH?
Which group seems to benefit from private information, according to tests of the Strong Form EMH?
What do most anomalies involve, based on the text?
What do most anomalies involve, based on the text?
What is the main outcome of tests for Strong Form EMH?
What is the main outcome of tests for Strong Form EMH?
According to the text, what do stock prices reflect in the Semi-strong Form EMH?
According to the text, what do stock prices reflect in the Semi-strong Form EMH?
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Study Notes
- An efficient capital market is characterized by quick price adjustments due to increased trading and investor attention.
- The Efficient Market Hypothesis (EMH) and the Capital Asset Pricing Model (CAPM) are related concepts.
- Technical analysis and fundamental analysis are different methods to evaluate investments.
- Technical analysis focuses on patterns and trends in historical price and volume data to predict future price movements.
- Fundamental analysis assesses the intrinsic value of an asset based on financial statements, economic indicators, and company news.
- Technical analysis can be applied to short-term trading or medium-term investing, and can provide opportunities and risk management.
- Fundamental analysis is used for long-term investing and provides a deeper understanding of a company's business and future prospects.
- Technical analysis is based on the assumption of market inefficiency and can be subjective and prone to false signals.
- Fundamental analysis assumes a semi-efficient market, where prices generally reflect available information but may deviate due to market psychology or short-term fluctuations.
- Technical analysis is often considered incompatible with efficient market theory, as they have opposing views on market efficiency.
- Market efficiency comes in different forms: weak-form, semi-strong-form, and strong-form.
- Weak-form market efficiency implies that historical price and volume data are of no use in beating the market, making technical analysis useless.
- Semi-strong-form market efficiency suggests that all publicly available information is fully reflected in current prices, making it unlikely that fundamental analysis can outperform the market.
- Strong-form market efficiency assumes that all available information, including private information, is fully reflected in prices, making it theoretically impossible for anyone to outperform the market.
- Tests for market hypotheses include statistical tests and event studies.
- Weak-form market hypothesis tests often fail to find consistent relationships between past price changes and future returns.
- Event studies reveal that stock prices adjust rapidly to major news announcements, making it difficult to make abnormal profits based on such information.
- Technical analysis strategies based on historical data generally underperform against simple buy-and-hold strategies.
- Certain short-term trading strategies using technical indicators might achieve some success, especially in volatile markets.
- Some argue that certain asset classes, like small-cap stocks, might exhibit weak relationships between past and future returns, offering potential exploitable inefficiencies.
- Random walk tests show no predictable patterns in price changes.
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