Ch 7

Question 1

the stock price reflects the information in past prices

Answer 1

random walk

Question 1

investors at _____ in time estimate the value of an asset based on expectations for the future

Answer 1

any point

Question 2

expectations are assumed to be

Answer 2

unbiased and rational

Question 3

each price change in a random walk approach will be

Answer 3

independent of the previous one

Question 4

will knowing asset history help predict future price changes in a random walk approach ?

Answer 4

no

Question 5

” not too high “
“not too low “
“ just right “

Answer 5

unbiased approach

Question 6

investors are not always rational in the way they set expectations

Answer 6

true

Question 7

what are some causes of irrationalities that reflect expectations

Answer 7

being set too low or set too high for other assets

Question 8

what does irrationalities mean for good and bad news ?

Answer 8

next piece of information is more likely to contain good news for the first asset and bad news for the second

Question 9

what may provide information to markets ?

Answer 9

price changes

Question 10

a stock that has gone up strongly the last four days may be viewed as

Answer 10

good news by investors

Question 11

what two tools are used for predicting future price movements ?

Answer 11

price charts and price patterns

Question 12

first studies of market efficiency focused on the relationship between

Answer 12

price changes over time

Question 13

evidence can be classified in how many classes

Answer 13

4

Question 14

look at short-term (minutes & hours) price behavior

focus on short-term (daily & weekly price movements)

look at medium term (many months or yearly returns)

examine long-term (fiver-year returns) price movements

Answer 14

four classes of evidence

Question 15

measures the relationship between price changes in consecutive time periods : hourly, daily, weekly etc.

Answer 15

serial correlation

Question 16

a measure of how much the price change in any period depends on the price change over the previous time period

Answer 16

serial correlation

Question 17

shows the momentum

Answer 17

positive serial correlation

Question 18

low or no serial correlation can be expressed as

Answer 18

short term : minutes and hours

Question 19

shows the reversal

Answer 19

negative serial correlation

Question 20

there is very low serial correlation (liquidity) with two structural effects

Answer 20

low or no serial correlation

Question 21

if markets are not liquid, you will see serial correlation in index returns

Answer 21

market liquidity effect

Question 22

creates a bias in the opposite direction

Answer 22

bid-ask spread

Question 23

what are the two structural effects of short-term minutes & hours

Answer 23

market liquidity effect
bid-ask spread

Question 24

the serial covariance in returns must be

Answer 24

negative

Question 25

the bid -ask spread should be

Answer 25

positive

Question 26

what shows the strategy of selling short from the top decile of stocks and buying the bottom decile with a holding period

Answer 26

short term- price reversal

Question 27

mid-term price momentum gives

Answer 27

a positive serial correlation

Question 28

momentum accompanied by higher trading volume is stronger and more sustained than momentum with low trading volume

Answer 28

volume effect

Question 29

sub periods where momentum and firm size are correlation

Answer 29

size effect

Question 30

depending on the time periods, upside momentum can dominate over longer periods while downside momentum can win out over some sub-periods , vise-versa

Answer 30

upside vs downside