Module 38.1: Market Efficiency Flashcards
What is an informationally efficient capital market?
is one in which the current price of a security fully, quickly, and rationally reflects all available information about the security.
What strategy should investors use in a perfectly efficient market?
passive investment strategy, because active investment management strategies will underperform due to transactions costs and management fees.
What is the difference between market value and intrinsic value or fundamental value?
fundamental value is the value that a rational investor with full knowledge about the asset would willingly pay.
How does the number of market participants effect efficiency?
larger number of investors, analysts, and traders the more efficient
how does availability of information effect efficiency?
more information the more efficient, in emerging markets, the availability of information is lower, and consequently market prices are relatively less efficient.
How does impediments to trading arbitrage improve efficiency?
impediments to arbitrage such as transaction costs and lack of indormation will limit arbitrage activity and allow some price inefficiencies.
how does transaction and information costs effect market efficiency?
to the extent the costs of trading are higher than expected profit, the market prices will be inefficient.
What is weak form market efficiency?
states that current security prices fully reflect all currently available security market data. a trader cannot achieve risk positive returns on average by using technical analysis.
what is semi-strong form market efficiency?
security prices rapidly adjust without bias to arival of new public information. cannot achieve positive risk adjusted returns by using fundamental analysis.
what is strong form market efficiency?
security prices fully reflect all information from both public and private sources. no investor can achieve positive abnormal returns.
What is technical analysis?
seeks to earn positive returns by using historical price and volume data.
What is fundamental analysis?
based on public information such as earnings, dividends, and various accounting ratios and estimates.
How can an investor test a semi-strong form market?
event study - examines the abnormal returns before and after the release of new information that affects a firms intrinsic value.
What is the strategy applied to semi-strong efficiency?
a passive investment strategy. portfolio managers can add value by establishing and implementing portfolio risk and return onjectives and tax management.
What are calendar anomalies?
finding that during the first five days of january, stock returns, epecially for small furms are significantly higher than they are the rest of the year.
