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Prt Mgmt
Chap 9
| Question | Answer |
|---|---|
| what are the two important predictors of the EMH | 1. That security prices properly reflect whatever information is available to investors 2. Active traders will find it difficult to outperform passive strategies such as holding market indexes. |
| behavioral finance | models of financial markets that emphasize potential implications of psychological factors affecting investor behavior. |
| two broad categories of behavioral finance irrationalities | 1. invest's dont always process info correctly and therefore infer incorrect probability distributions about future rates of return 2. even given a pprobability distribution of returns, they often make inconsis. or systematically suboptimal decisions |
| 4 bias errors that lead investors to misestimate rates of return | forecasting errors, overconfidence, conservatism, sample size neglect and representativeness |
| forecasting errors | people give to much weight to recent experience compared to prior beliefs when making forecasts and make forecasts that are too extreme. |
| t or f high P/E ratios tend to be good investments | false |
| overconfidence | people tend to overestimate their abilities. |
| what percentage of mutual funds is held in indexed accounts | only about 10% |
| who tend to be more over confident, men or women? | men, single men |
| conservatism | this bias means that investors are too slow in updating their beliefs in response to new evidence. They may under react to news about a firm. |
| sample size neglect and representativeness | people are too prone to believe that a small sample is representative of a broad population and infer patterns to quickly |
| 4 types of behvaioral biases | framing, mental accounting, regret avaidance, and prospect theory |
| framing | decisions are affected by how choices are posed, for example, as gains relative to a low baseline level or losses relative to a higher baseline. |
| mental accounting | a specific form of framing in which people segregate certain decisions. For example, and investor may take a lot of risk with one investment acct by establish a very conservative position with another for child's educ. |
| t or f behavioral investors are reluctant to realize losses | true |
| regret avoidance | people blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions. (explains both size and book to market effect) |
| prospect theory | behavioral theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth |
| What limits the profits of mispricing? | Fundamental risk, Implementation costs, model risk |
| fundamental risk | finding a underpriced stock may look like a profit opportunity but it may take the market time to catch up to the stocks intrinsic (real) value, where as you could lose money. |
| implementation costs | exploiting overpricing can be hard. short sellers may have to return the money borrowed quickly leaving the short sale uncertain |
| model risk | what if the price of the security is actually right and the formula you are using is wrong. |
| siamese twin companies | two companies the same should sell for about the same price but in fact does not. |
| t or f closed end funds often sell for substantial discounts or premiums from net asset value. | true |
| law of one price | effectively identical assets should have identical prices |
| irrational exuberance | Alan Greenspan call the dot come boom this. |
| Stock Value Formula | Dividend/(discount rate-growth rate) |
| t or f long term continuations of abnormal returns are consistent with overareaction | true |
| technical analysis | attempts to exploit recurring and predictable patterns in stock prices to generate superior investment performance. |
| disposition effect (one of the best documented behavior tendencies) | refers to the tendency of investors to hold on to losing investments. |
| what do tech analysts look for? | trends in market prices. This is in fact a search for momentum. |
| dow theory (named after its creator, Charles Dow) | a technique that attempts to discern long and short term trends in stock market prices. |
| who established the wall street journal | Charles Dow |
| What 3 forces does the Dow theory advocate | 1 primary trend=long term movement of prices, fr several mo. to several yrs 2. Secondary trend=caused by short term deviations of prices from underlying trend line. 3. tertiary or minor trends=are daily fluctuations of little importance |
| Elliot Wave theory | stock prices can be described by a set of wave patterns. Long term and short term wave cycles are superimposed and reslt in a complicated pattern of price movements. |
| Kondratieff Wave Theory | the macroweconomy and therefore the stock market moves in broad waves lasting between 48-60 years. |
| point and figure chart | figure has no time demension. It simply traces significant upward or downward movements in stock prices without regard to their timing. |
| congestion area | a horizontal band of X's and O's created by several price reversals. |
| Two popular measures in length variation for the moving average that are considered most predictive | 200-day & 53-week moving averages. |
| breadth | a measure of the extent to which movement in a market index is reflected widely in the price movements of all the individual stocks in the market. |
| what is the most common measure of breadth? | the spread between the number of stocks that advance and decline in price. |
| t or f breadth numbers are reported in WSJ | true |
| relative strength | recent performance of a given stock or industry compared to that of broader market index. (stock/level of stock industry) rising ratio says stock is outperforming the rest of industry |
| t or f if relative strength persists over time, this means that the stock is doing better than the rest of its market industry and should be bought | true |
| trin statistic | the ratio of average volume in declining issues to average volume in advancing issues. |
| trin formula (ratios above 1.0 are bearish | (volume declining/number declining)/(volume advancing/number advancing) |
| where is trin formula reported in WSJ | in the diaries section |
| confidence index (assumption is that actions in the bond mkt will reveal trends in the stock mkt.) | ratio of the yield of top 10 rated corporate bonds to the yield on 10 intermediate grade bonds. (always lower than 100%, the closer to 100% is a bullish signal) |
| short interest | the total number of shares currently sold-short in the market. (some consider a high number bullish some as bearish) |
| put/call ratio | ratio of put options to call options outstanding on the stock. (some see as bullish and some as bearish) |
Created by:
delorya
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