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70 Cards in this Set
- Front
- Back
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Efficient Market Hypothesis
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as a pratical matter investors cannot consistently beat the market
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Central Issue in market efficiency debate?
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Can You or any one else consistently "beat the market
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Excess Return
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a return in excess of that earned by other invesments having the same risk
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"Beating The Market
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consistently earning a positive excess return
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What leads to Market Efficiency
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Investor Rationality, independent deviations from rationality, and arbitrage
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Weak-Form Efficient
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Market which the information reflected in past prices and volume figures is of no value in beating the maket
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Semistrong-Form Efficient
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Publicaly available information of any and all kinds is of no use in beating the market
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Strong-Form Efficient
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No information of any kind, public or private is useful in beating the market
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Driving Force to market efficiency
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Competition and profit motive
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Random Walk
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No discernible pattern to the path that a stock price follows through time
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Implications of
Market Efficiency |
Weak-Form-Random Walk
Semistrong Form-Efficient market reaction, Delayed reaction, overreaction and correction. |
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Informed Trader
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An investor who makes a buy or sell decision based on public information and analysis
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Insider Trader
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An investor who makes a buy or sell decision based on non=public information and analysis, not all insider traders are doing illegal activity
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Illeger insider trading
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when someone has material nonpublic information
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Material Nonpublic Information
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Private knowlege that can substantially inflence the share price of a stock
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Legal Insider Trading
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Company's insiders can trades inside the stock of their company
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Day-of-the-week-effect
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the dendency for monday to have a negative avearage return
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January Effect
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Tendency for small stocks to have large returns in january
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Bubble
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Situation where observed prices soar far higher than fundamentals and rational analysis would suggest
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Crash
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A situation where maket prices collapse significantly and suddenly
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The Crash of 1929
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Roaring 20s, everyone thought they could get rich, at the time investors could purchase stocks by putting up 10 percent of the purchase price, and borrowing the remainder from a broker.
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The Crash of October 1987
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black monday, Dija fell more than 100 points in a day for the first time
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NYSE Circuit Breakers
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As a result of the 1987 crash, there was the introduction of NYSE circuit breakers-Rules that kick in to slow or stop trading when the DIJA declines by more than a present ammount in a trading session
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Circuit Breaker times
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1. 10-% drop in the DIJA-halts trading 1 hour if befor 2pm, 1/2 hour between 2-2:30, non after. 2 20 percent drop-2hours halt befroe 1pm, 1hour 1-2pm. 30 percent drop. will halt trading for the remainder of the day regardless of when
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Behavioral Finance
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the area of finance dealing with the implications of investor reasoning errors on investment decisions and market prices
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Prospect theory
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an alternative theory to classical, rational economic decision making which ehphasizes amoung other things, that investors tend to behave differently when they face prospective gains and losses
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Mental Accounting
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associating a stock with its purchase price
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loss aversion
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a reluctance to sell investments after they have fallen in value. Also known as the breakeven or disposition effect.
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Hot hand fallacy
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Cause by the clustering illusion-"human belief that random events that occure in clusters are not really random.
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The Gamblers fallacy
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Assumption that a departure from what occures on average, or in the long rund, will be corrected in the short run
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sentiment-based risk
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A source of risk to investors above and beyonds firm-specific risk and overall market risk
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Technical analysis
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using past price data and other nonfinancial data to identify future trading opportunities
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Prime Rate
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The basic interest on short-term loans that the largest commecial banks charge to their most creditworthy corporate customers
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Federal Funds Rate
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Interest rate that banks charge each other for overnight loans of 1mil dols. or more
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Commercial Paper
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Short-term, unsecured debt issued by the largest corporations
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Bankers acceptance
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a postdated check on which a bank as a gauranteed payment; commonly used to finance international trade transactions
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Certificate of deposit
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Larg-denomiation deposits of 100,000 or more at commercial banks for a specified time
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T-Bill
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A short-term u.s government debt instrument issued by the u.s treasury
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basis point
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a method for quoting interest rates on money market instruments
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Treasury yield curve
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a graph of treasure yields plotted against maturities
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Term Structure of interest rates
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relationship between time to maturity and interest rates for default-free, pure discount instruments.
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U.S Treasury STRIPS
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Pure discount securities created by stripping coupons and principal payments of treasure notes and bonds. Stands for separate trading of registered interest and principal of securities.
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Fisher Hypothesis
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Assertion that the general level of nominal interest rates follow the general level of inflation
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Expectations theory
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the term structure of interest rates is a reflection of financial markets beliefs regarding future interest rates
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Maturity preference theory
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long-term interest rates contain a maturity permium necessary to induce lenders into making longer-term-loans
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Market segmentations theory
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Debt markets are segmented by maturity with the result that interest rates for various marurities are determined separately in each segment
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coupon rate
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a bonds annual coupn divided by its par value, also called coupn ield or nominal yield
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Current yield
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a bond's annual coupon divided by its market price
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Yield to maturity
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the discount rate that equates a bond's price with the present value of its future cash flows. Also called a promised yield or just yield
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Premium bonds
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bonds witha price greater than the par value are said to be selling at a premium. The yield to maturity of a premium bond is less than its coupon rate
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discount bonds
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bonds with a price less than par value are said to be selling a a discount. The yield to maturity of a par bond is equal to its coupon rate
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Par bonds
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bonds with a price equal to par value are said be selling at par. the yield to maturity of a par bond is equal to its coupon rate
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Bond Price relationship to interest rates
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Inverse relationship, as interest rates go up bond prices go down
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callable bond
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a bond is callable if the issuer can buy it back before it matures
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Duration
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a widely used measure of a bond's sensitivity to changes in bond yields
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Immunization
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Constructing a portfolio to minimize the uncertainty surrounding its target date value
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Plain Vanilla Bonds
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Bonds issued witha relatively standard set of features, aka bullet bonds
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Mortgage bond
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debt secured with a property lien
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Unsecured debt
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bonds, notes, or other debt issued with no specific collateral fledged as security for the bond issue
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debentures
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unsecured bonds issued by a corporation
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covertible bonds
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bonds that holders can exchange for common stock according to a prespecified conversion ratio
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Preferred stock
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a security with a claim to dividend payments that is senior to common stock
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Event risk
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the possibility that the issuing corporatin will experience a significant change in its bond credit quality
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protective covenants
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restritions in a bond indenture designed to protect bondholders.
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Face value
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the value of a bill, note, or bond at its maturity when a payment of principal is made
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Zero coupon bond
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a not or bond paying a singl ecash flow at maturity
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STRIPS
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treasurey program allowing investorys to buty individual coupon and principal payments from a whole treasurey not or bond,
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Series EE bond
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25-10,000 dollars, the original issue price is always half of its face value.
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Series I savings bond
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Accrual-type security wiht interest added to the bond monthly, 50-10,000 dollars
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Insured municipal bonds
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bonds secured by an insurance policy that guarantees bond interest adn principal payments should the issuer default
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