Fin4504 Test 3

Front 1

Random walk

Back 1

the notion that stock price changes are random and unpredictable.

Front 2

Efficient market hypothesis

Back 2

the hypothesis that prices of securities fully reflect available information about securities

Front 3

Weak-form EMH

Back 3

the assertion that stick prices already reflect all information contained in the history of past trading

Front 4

Semistrong-form EMH

Back 4

size effect, book-to-market, PEAD

the assertion that stock prices already reflect all publicly available information

Front 5

Strong-form EMH

Back 5

insider trading, mutual fun performance

the assertion that stock prices reflect all relevant information, including inside information

Front 6

Technical analysis

Back 6

research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market

Front 7

Resistance level

Back 7

a price level above which it is supposedly unlikely for a stock or stock index to rise

Front 8

Support level

Back 8

a price level below which it is supposedly unlikely for a stock or stock index to fall

Front 9

Fundamental analysis

Back 9

research on determinants of stock value, such as earnings and dividend prospects, expectations for future interest rates, and risk of the firm

Front 10

Passive investment strategy

Back 10

buying a well-diversified portolio without attempting to search out mispriced securities

Front 11

Index fund

Back 11

a mutual fund holding shares in proportion to their representation in a market index such as the S&P 500

Front 12

Momentum effect

Back 12

Jegadeesh & Titman

the tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods

Front 13

Reversal effect

Back 13

Jegadeesh & Titman

the tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period

Front 14

Anomalies

Back 14

patterns of returns that seem to contradict the efficient market hypothesis

Front 15

P/E effect

Back 15

portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks

Front 16

Small-firm effect

Back 16

stocks of small firms have earned abnormal returns, primarily in the month of January

Front 17

Neglected-firm effect

Back 17

the tendency of investments in stock of less-well-known firms to generate abnormal returns

Front 18

Book-to-market effect

Back 18

Fama & French

the tendency for investments in shares of firms with high ratios of book value to market value to generate abnormal returns

Front 19

Behavioral finance

Back 19

models of financial markets that emphasize portential implications of psychological factors affecting investor behavior

Front 20

Conservatism

Back 20

a conservatism bias means that investors are too slow (too conservative) in updating their beliefs in response to recent evidence

Front 21

Representativeness bias

Back 21

people are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly

Front 22

Framing

Back 22

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.

Front 23

Mental accounting

Back 23

Mental accounting is a specific form of framing in which people segregate certain decisions.

Front 24

Regret avoidance

Back 24

People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.

Front 25

Prospect theory

Back 25

behavioral theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth.

Front 26

Dow theory

Back 26

a technique that attempts to discern long- and short-term trends in stock market prices.

Front 27

Breadth

Back 27

the extent to which movements in broad market indexes are reflected widely in movements of individual stock prices.

Front 28

Relative strenght

Back 28

recent performance of a given stock or industry compared to that of a broader market index.

Front 29

Trin statistic

Back 29

the ratio of average volume in declining issues to average volume in advancing issues.

Front 30

Confidence index

Back 30

ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds

Front 31

Short interest

Back 31

the total number of shares currently sold-short in the market.

Front 32

Put/call ratio

Back 32

ratio of put options to call options outstanding on a stock

Front 33

Call option

Back 33

the right to buy an asset at a specified exercise price on or before a specified expiration date.

Front 34

Exercise or strike price

Back 34

price set for calling (buying) an asset or puttng (selling) an asset.

Front 35

Premium

Back 35

purchase price of an option.

Front 36

Put option

Back 36

the right to sell an asset at a specified exercise price on or before a specified expiration date.

Front 37

In the money

Back 37

an option where exercise would be profitable.

Front 38

Out of the money

Back 38

an option where exercise would not be profitable.

Front 39

At the money

Back 39

an option where the exercise price and asset are equal.

Front 40

American option

Back 40

can be exercised on or before its expiraton

Front 41

European option

Back 41

can be exercised only at expiration

Front 42

Protective put

Back 42

an asset combined with a put option that guarantees minimum proceeds equal to the put's exercise price.

Front 43

Risk management

Back 43

strategies to limit the risk of a portfolio

Front 44

Covered call

Back 44

writing a call on an asset together with buying the asset

Front 45

Straddle

Back 45

a combination of a call and a put, each with the same exercise price and expiration date.

Front 46

Size effect (small firm)

Back 46

Banz, Reinganum, Keim?

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

Front 47

Book-to-market

Back 47

Fama & French

high ratios of BV to MV generates abnormal returns

Front 48

Post-Earnings Announcement Drift

Back 48

Bernard & Thomas

sluggish response of stock prices after announcement of earnings (60 days)

Front 49

Odean's FIRST Study

Back 49

Stocks sold by investors outperformed those bought by investors. INVESTORS TRADE TOO MUCH.

Front 50

Odean and Barber SECOND Study

Back 50

Those who trade the most have the worst cost-adjusted performance. TRADING IS HAZARDOUS TO WEALTH.

Front 51

Barber and Odean's Boys Will Be Boys

Back 51

Men trade more than women overall. Single men vs. single female- men trade more. Married men trade less than single men.

Front 52

Barber and Odean Online Trading

Back 52

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.

Front 53

Overconfidence and individual trading behavior -Svenson

Back 53

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

Front 54

Self-attribution bias

Back 54

attribute one's success to his own ability but the failure to bad luck.

Front 55

Disposition effect -Odean

Back 55

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.

Front 56

Prospect theory

Back 56

a positive utility theory (what has been actually observed in human behavior). Investors care about the CHANGE in wealth.

Front 57

Expected utility theory

Back 57

investors only care about total wealth andy are risk averse

Front 58

Prospect theory - Tversky & Kahneman

Back 58

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)