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Portfolio Mgmt

Chap 8

Efficient market hypothesis (EMH) the theory that prices of securities fully reflect available information about securities
random walk the notion that stock price changes are random and unpredictable
weak form EMH the belief that stock prices already reflect all information contained in the history of past trading
semistrong form EMH the belief that sock prices already reflect all publicly available information
Rule 10b-5 this is of the Security Exchange Act of 1934, it sets limits on trading by corporate officers, directs and substantial owners, requiring them to report trades to the SEC. Insiders, associates, relatives who trade on insider info is a violation of law
technical analysis (chartists) the search for recurrent and predictable patterns in stock prices. The key to successful technical analysis is a sluggish response of stock prices to fundamental supply and demand factors.
relative strength approach the chartist compares stock performance over a recent period to performance of the market or other stocks in the same industry. Compare stock price to market. If price increases over time it is said to have relative strenth b/c better than mkt
resistance levels a price level above which it is supposedly unlikely for a stock or stock index to rise
support level a price level below which it is supposedly unlikely for a stock or stock index to fall.
self destructing a price pattern that once the public is aware of will no longer be of value
fundamental analysis uses earnings and dividends of the firm, expectations of future interest rate, and risk eval of firm to determine proper stock prices
t or f if stock value is better then the stock price, fundamental analysts would recommend the stock true
what information do fundamental analyst consider 1. use past earnings 2. use balance sheets 3. quality of the firms mgmt 4. compare to other companies in the same industry
Trick to finding good stocks not to find good firms, but rather to find firms that are better than everyone's analysis
passive investment strategy (Buy and Hold strategy) makes no attempt to outsmart the market. Aims @ only establishing a well diversified portfolio w/0 attempting to find over or under valued stocks.
index fund a mutual fund holding shares in proportion to their representation in a market index such as the S&P 500, have low mgmt fees
who dominates the index market for indexed products Vanguard
Exchange traded funds ETFs close, and usually lower expense alternative to indexed mutual funds. these are shares of diversified portfolios that can be bought or sold just like shares of individual stock.
What factors cause the investor's optimal position to vary? age, tax bracket, risk aversion, and employment
role of portfolio manager in an efficient market tailor the portfolio to theses needs, rather than to beat the market
real assets plant, equip and know-how
what are 3 issues that imply that the debate will never be settled as to whether the market is efficient? 1. magnitude issue 2. selection bias 3. lucky event issue
the magnitude issue
what is the average standard deviation of the S&P 500 ~20%
magnitude larger portfolio stands to benefit more money using security analysis. Example: 1M*.01=$10k and 1B*.01=$10M BIG DIFFERENCE!!!
SELECTION BIAS ISSUE if you find money making plan in stock mrkt you have two options 1. post in Wall street Jour and get famous or 2. keep it to yourself and get rich. most keep to themselves.
Lucky Event Issue some investors do well, does this disprove the efficient market hypothesis? No, some investors just get lucky, the proper test is to see if the investor can do it again, this approach is rarely taken
Momentum effect the tendency of poorley performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.
Weak form tests one of trends in stock prices is by measureing serial correlation of stock mkt rtns.
Positive serial correlation refers to the tendency for stock returns to be related to past returns. positive serial corr means that positive returns tend to follow positive returns (a momentum type property)
negative serial correlation means that positive returns tend to be followed by negative returns (a reversal or correction property)
momentum effect good or bad recent performance of particular stocks continues over time. portfolios of the best performing stocks in recent past appear to outperform other stocks with enough reliability to offer profit opportunities.
returns over the long haul stock returns do seem to have positive correlation over short term only, over the long haul studies show pronounced negative long term serial correlation
t or f strong tendencies for poorly performing stocks in on one period tend to follow with good periods true and visa versa, if stocks are doing poorly they tend to do better the next period
reversal effect the tendency of poorly performing stocks and well performing stocks in one period to experience reversals in the following period (suggests that the stock mkt overreacts to relevant news.
contrarian investment strategy investing in recent losers and avoiding recent winners should be profitable
anomalies patterns of returns that seem to contradict the efficient market hypothesis (examples include p/e ratio and market capitalization)
P/E effect portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.
small firm efffect shows the historicasl performance of portfolios formed by ddividing the NYSE stocks into 10 portfolios each yr according to firm size (ie. total value of outstanding equity). small firms are consist higher.
t or f the small firm effect occurs virtually entirely in January. In fact, in the first 2 weeks of Jan. true
t or f because small firms tend to be neglected by large institution traders, information about smaller firms is less available. true
neglected firm effect the tendency of investments in stock of less well known firms to generate abnormal returns. the jan effect is largest for neglected firms.
what causes the abnormal returns for smaller firms because small and less analyzes stocks are less liquid, the liquidity effected might be a partial explanation for their abnormal returns. It does not explain why it happens in Jan.
Book to market ratios book value of firms equity to market value of equity. the highest book to market ratio had avg rtn of 18.70% and lowest was 10.64%
how do you figure the market expectations of earnings for a firm can be roughly measured by averaging the published earnings forecasts of wall street analysts or by applying trend analysis to past earnings.
earnings surprise the difference between the actual earnings announced and the market expectations
t or f the market continues to rise or fall even after the earnings announcement has been made for a company true, it will continue to grow if it was positive and fall if it was negative (one does stand to gain by buying stock of positive earning announcements after earning announcements
Insider information trades are regulated and limited to insiders.
security transactions and Holdings all insiders have to register their trading activity with their company as stated by the SEC. Large trades must be reported within 2 business days.
stocks with higher betas known as factor loadings, have higher average returns.
noisy market hypothesis market prices may contain pricing errors "noise" relative to the true value of the firm. At anytime some stocks may be over or under valued. some say this would cause the index port to have the to be weighted with the worst return prospects.
fundamental indexing nothing more than a value tilt. Despite it's name it is not really indexing at all but rather a form of active investing and is hardly a radical new approach to either indexation or investment policy
alpha the return in excess of the required return
survivorship bias the tendency for less successful funds to go out of business over time, thus leaving the sample. This can give rise to the appearance of persistence in performance, even if there is none in reality.
winner fund one in the top half of the distribution of returns in a given period
loser fund one in the bottom half of the distribution of returns in a given period.
Created by: delorya



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