Pre Ch. 6

Question 1

σ ?

Answer 1

Standard Deviation or Sigma

Question 2

HPR & HPRR

Answer 2

Holding Period Return
HPR = income received + change in price / beg price

Holding Period Return Relative
HPRR = income received + ending price / Beg price

or

HPR + 1

Question 3

Nasdaq 100

Answer 3

100 biggest non-financial companies

Good for comparing tech portfolios

Question 4

Treynor Ratio

Answer 4

Known as “Reward to Volatility Ratio”

Tp = Rp - Rf / βp (higher the ratio the better)
​	 
where:
βp = beta coefficient 
Rp = actual return
Rf = risk free rate

Question 5

Information Ratio

Answer 5

IR = (Rp - Rb) / σa (higher is better)

Rp = actual return
Rb = return on benchmark
σa = standard dev on the difference between your portfolio and the return on benchmark

Question 6

Efficient Market Hypothesis

Weak Form
Semi-Strong Form
Strong Form

Answer 6

The theory that the market correctly prices securities in light of known, relevant information.

Weak form - current stock prices reflect all information based on trading data.

Semi-strong form - when new information is made public the next trade will be at a price that reflects that information.

Strong form - stock prices reflect all known and unknown information.

Question 7

To test weak form market theory what 2 tests can be used?

Answer 7

Serial correlation coefficient
&
Filter rules

Question 8

Sharpe Ratio

Answer 8

Sp = Rp - Rf / σp

Rp = actual return
Rf = risk free rate
σp = standard deviation

Higher the sharpe ratio the better
A measure of performance relative to risk taken
Sometimes known as “reward to volatility ratio”

Question 9

The Beta for the market is always?

Answer 9

1

Beta is a measure of the volatility, or systematic risk, of a security or portfolio, in comparison to the market as a whole.

Question 10

Jensen’s Alpha (α)

Answer 10

Absolute measure of performance

\+1 = beat the market by 1% per period
0 = fair rate of return compared to the risk. 

α = Rp - (Rf + Bp (Rm - Rf))

Question 11

Alpha

Answer 11

Absolute measure of performance.

Ability to beat the market +1% = better than mkt, 0 = fair return to risk, -1% lower than the mkt.

Question 12

Point and Figure Method

Answer 12

x indicates the price is rising
0 indicates the price is falling
No time element
Only entry is based on significant price movement

X    X
X 0 X
X 0 X 0
X 0 X 0
       X 0 
       X 0

Question 13

Resistance and Support Levels

Answer 13

Resistance Level (ceiling value)
Supply increases as stock becomes overpriced. 

Support Level
Demand increases as stock becomes undervalued.

Question 14

Bar chart

Answer 14

Plots daily price changes over time
Typically contains data on high, low, volume
Classic pattern

Question 15

Technical Indicators

Answer 15

Moving Average
Advance Decline Index
Relative Strength Index

Question 16

Sentiment Indicators Explained

• Contrarian Approach
• Barron’s Confidence Index

Answer 16

Contrarian Approach
When odd lots of sales are reported as high it means the “little guys” are getting in and its time to get out.
Odd lot sales are usually purchases under 100 shares.

Question 17

Examples of different trading anomaly’s

Answer 17

Sell Friday, buy Monday

S&P 500 or other index announces a new stock. Buy that stock before the ETF’s and Mutual Funds do.

Question 18

Small Firm Effect

Answer 18

• Consistently small firms outperform larger firms.
• some form of risk premium
• analysts tend to ignore small firms
• Primarily small firms outperform in January
• Price tends to get beaten down at the end of the year.

Question 19

What is the serial Correlation Coefficient?

Answer 19

Tests for statistically significant relationships between returns.

Question 20

Filter Rule

Answer 20

Stock prices move in some cyclical manner

Pick an ex filter %. Buy the stock. When it goes up by that % and sell the stock when it goes down by that %.