Chapter Nine Terms

Question 1

Random Walk Hypothesis

Answer 1

Predicting stock price movements is very difficult because new information is unpredictable

Question 2

Efficient Market

Answer 2

Market that rapidly and fully incorporates all new information

Question 3

Efficient Markets Hypothesis (EMH)

Answer 3

Stock prices rapidly incorporate new information, making it difficult for investors to earn abnormally high returns by identifying undervalued stocks

Question 4

Abnormal Return (Alpha)

Answer 4

Difference between an investment’s actual return and its expected return

Question 5

Weak Form of the EMH

Answer 5

Stock prices fully reflect any relevant information that can be obtained from the analysis of past price movements

Question 6

Semi-Strong Form of the EMH

Answer 6

Stock prices fully reflect all relevant information that investors can obtain from any public source

Question 7

Strong Form of the EMH

Answer 7

Stock market can rapidly incorporate new information even if it is not disseminated through public sources

Question 8

Arbitrage

Answer 8

Transaction in which an investor simultaneously buys and sells the same asset at different prices to earn an instant, risk-free profit

Question 9

Market Anomalies

Answer 9

Market patterns that are inconsistent with EMH, meaning there is less evidence contradicting EMH then supporting it

Question 10

Behavioural Finance

Answer 10

The assumption that investors, managers, and other actors in financial markets are rational, behavioural finance posits and market mistakes are linked to cognitive biases

Question 11

Overconfidence

Answer 11

People putting too much faith in their own ability to perform complex tasks

Question 12

Self-Attribution Bias

Answer 12

When something good happens, individuals attribute that outcome to actions that they have taken, but when something bad happens, they attribute it to bad luck

Question 13

Loss Aversion

Answer 13

People feel the pain of loss more acutely than the pleasure of gain

Question 14

Representativeness

Answer 14

Cognitive biases that occur because people have difficulty thinking about randomness in outcomes

Question 15

Narrow Framing

Answer 15

People tend to analyze a situation in isolation, while ignoring the larger context

Question 16

Belief Perseverance

Answer 16

People typically ignore information that conflicts with their existing beliefs

Question 17

Anchoring

Answer 17

Individuals attempting to predict or estimate some unknown quantity place too much weight on information that they have at hand, even when that information is not relevant

Question 18

Familiarity Bias

Answer 18

People invest in things that are familiar to them

Question 19

Technical Analysis

Answer 19

Searching the historical record of stock prices and returns for patterns

Question 20

Confidence Index

Answer 20

Ratio that reflects the spread between the average yield on high-grade corporate bonds (Should never exceed 1.0)

Question 21

Short Interest

Answer 21

The number of stocks sold short in the market at any point in time

Question 22

Theory of Contrary Opinion

Answer 22

Amount and type of odd-lot trading is an indicator of the market and pending changes

Question 23

Market Technicians

Answer 23

Analysts who believe it is chiefly supply and demand that drive stock prices

Question 24

Charting

Answer 24

Visual summaries of activity that analyzes developing trends and the future behaviour of the market or individual stocks

Question 25

Moving Average

Answer 25

Mathematical procedure that records the average value of a series of prices, or other data, over time