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58 Cards in this Set

  • Front
  • Back
Random walk
the notion that stock price changes are random and unpredictable.
Efficient market hypothesis
the hypothesis that prices of securities fully reflect available information about securities
Weak-form EMH
the assertion that stick prices already reflect all information contained in the history of past trading
Semistrong-form EMH
size effect, book-to-market, PEAD

the assertion that stock prices already reflect all publicly available information
Strong-form EMH
insider trading, mutual fun performance

the assertion that stock prices reflect all relevant information, including inside information
Technical analysis
research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market
Resistance level
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
Fundamental analysis
research on determinants of stock value, such as earnings and dividend prospects, expectations for future interest rates, and risk of the firm
Passive investment strategy
buying a well-diversified portolio without attempting to search out mispriced securities
Index fund
a mutual fund holding shares in proportion to their representation in a market index such as the S&P 500
Momentum effect
Jegadeesh & Titman

the tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods
Reversal effect
Jegadeesh & Titman

the tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period
patterns of returns that seem to contradict the efficient market hypothesis
P/E effect
portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks
Small-firm effect
stocks of small firms have earned abnormal returns, primarily in the month of January
Neglected-firm effect
the tendency of investments in stock of less-well-known firms to generate abnormal returns
Book-to-market effect
Fama & French

the tendency for investments in shares of firms with high ratios of book value to market value to generate abnormal returns
Behavioral finance
models of financial markets that emphasize portential implications of psychological factors affecting investor behavior
a conservatism bias means that investors are too slow (too conservative) in updating their beliefs in response to recent evidence
Representativeness bias
people are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly
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
Mental accounting is a specific form of framing in which people segregate certain decisions.
Regret avoidance
People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.
Prospect theory
behavioral theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth.
Dow theory
a technique that attempts to discern long- and short-term trends in stock market prices.
the extent to which movements in broad market indexes are reflected widely in movements of individual stock prices.
Relative strenght
recent performance of a given stock or industry compared to that of a broader market index.
Trin statistic
the ratio of average volume in declining issues to average volume in advancing issues.
Confidence index
ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds
Short interest
the total number of shares currently sold-short in the market.
Put/call ratio
ratio of put options to call options outstanding on a stock
Call option
the right to buy an asset at a specified exercise price on or before a specified expiration date.
Exercise or strike price
price set for calling (buying) an asset or puttng (selling) an asset.
purchase price of an option.
Put option
the right to sell an asset at a specified exercise price on or before a specified expiration date.
In the money
an option where exercise would be profitable.
Out of the money
an option where exercise would not be profitable.
At the money
an option where the exercise price and asset are equal.
American option
can be exercised on or before its expiraton
European option
can be exercised only at expiration
Protective put
an asset combined with a put option that guarantees minimum proceeds equal to the put's exercise price.
Risk management
strategies to limit the risk of a portfolio
Covered call
writing a call on an asset together with buying the asset
a combination of a call and a put, each with the same exercise price and expiration date.
Size effect (small firm)
Banz, Reinganum, Keim?

stocks of small firms have gained abnormal returns, primarly in January
Fama & French

high ratios of BV to MV generates abnormal returns
Post-Earnings Announcement Drift
Bernard & Thomas

sluggish response of stock prices after announcement of earnings (60 days)
Odean's FIRST Study
Stocks sold by investors outperformed those bought by investors. INVESTORS TRADE TOO MUCH.
Odean and Barber SECOND Study
Those who trade the most have the worst cost-adjusted performance. TRADING IS HAZARDOUS TO WEALTH.
Barber and Odean's Boys Will Be Boys
Men trade more than women overall. Single men vs. single female- men trade more. Married men trade less than single men.
Barber and Odean Online Trading
Investors who switch from phone-based trading to online experienced a 2% increase in performance in the short run prior to the switch but decrease by at least 3% in the long run because of over trading.
Overconfidence and individual trading behavior -Svenson
the tendency to overestimate one's ability to do well on tasks - found that because of overconfidence, investors trade too much. AKA above-the-avg effect
Self-attribution bias
attribute one's success to his own ability but the failure to bad luck.
Disposition effect -Odean
investors are more reluctant to realize their losses. hold losers too long and sell winners too soon. People have a tendency to realize more gains than losses.
Prospect theory
a positive utility theory (what has been actually observed in human behavior). Investors care about the CHANGE in wealth.
Expected utility theory
investors only care about total wealth andy are risk averse
Prospect theory - Tversky & Kahneman
the impact of a loss is twice as much as that of a gain of the same size (no gain or loss or gain $X but lose $50 with 50% probability)