29 Questions
What is a necessary condition for all investors to adjust stock valuations in the same way when news arrives?
All investors receive information in a timely fashion
According to Shleifer, what is a possible outcome when not all investors are rational?
The irrationality of optimists and pessimists will balance out
What is a characteristic of rational investors, according to Shleifer?
They adjust stock valuations in the same way when news arrives
What is the role of rational, professional investors in the market, according to Shleifer?
They push prices to the 'right' level when they see 'wrong' prices
What is a necessary condition for prices to adjust instantly when news arrives?
All investors receive information in a timely fashion
What is the primary purpose of identifying the information set in the context of market efficiency?
To forecast returns on securities based on available information
According to Roberts (1967), what is the term for the information set that includes all public information?
Semi-strong form efficient
What is the primary challenge in testing the efficiency of a stock market?
The joint hypothesis problem
Which asset pricing model is used to calculate abnormal returns in assessing market efficiency?
CAPM
What is required to assess whether a portfolio generates profits?
Both the returns generated and the risk associated with the portfolio
What is the term for the profits earned due to genuine economic trading opportunities?
Excess returns
What is the implication of an informationally efficient market?
Security prices are unaffected by revealing new information to all participants
What is the condition for a market to be considered efficient with respect to an information set 𝝮?
Security prices would be unaffected by revealing 𝝮 to all participants
What is the implication of Jensen's Definition of Efficiency?
An investor cannot make economic profits by trading on available information
What is the implication of Malkiel's Definition of Efficiency?
A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices
What is the condition for a security to be fairly valued in an efficient market?
The security price reflects all relevant information
What is the implication of the efficient market hypothesis?
It is impossible to tell which securities will deliver returns above or below their required returns
What is the main implication of the joint hypothesis when testing efficiency?
That rejecting the null hypothesis can be due to either or both parts of the hypothesis
Why do increased dividend payments not necessarily lead to predictable returns?
Because stock prices adjust instantly to new information
What do tests of efficiency inherently test?
Both the correctness of the asset pricing model and the informational efficiency of the market
What is the primary observation of researchers using Event Studies techniques?
Markets underreact to the news in earnings announcements.
What is the characteristic of companies that issue shares to the public for the first time?
They tend to underperform the market for up to 5 years.
What is the purpose of autocorrelations in testing efficiency?
To test the proposition that future returns are unrelated to past returns
What do event studies examine?
Price reactions to specific types of corporate or economic events
What is the observation of a momentum strategy in the market?
It delivers positive returns on average.
What is the implication of the existence of momentum in the market?
It is hard to consistently profit from security mispricing.
What is a consequence of rejecting the null hypothesis in efficiency tests?
Uncertainty when interpreting test results
What is the duration of the underperformance of companies that issue shares to the public for the first time?
Up to 5 years.
What is the characteristic of the abnormal returns of portfolios of stocks that have released unexpectedly good earnings news?
They are higher than those of portfolios of stocks that have released unexpectedly bad earnings news.
Test your understanding of the Efficient Market Hypothesis, including Jensen's and Malkiel's definitions of efficiency. Learn how markets process information and how prices reflect available data.
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