EMH Flashcards
(19 cards)
What does the Efficient Markets Hypothesis (EMH) propose?
That asset prices fully reflect all available information.
Who is primarily associated with the EMH?
Eugene Fama (1970).
What are the three forms of EMH?
Weak-form, Semi-strong-form, and Strong-form efficiency.
What is weak-form efficiency?
Prices reflect all past trading information; technical analysis is ineffective.
What is semi-strong-form efficiency?
Prices reflect all publicly available information; fundamental analysis can’t yield consistent excess returns.
What is strong-form efficiency?
Prices reflect all public and private information; even insider trading yields no consistent excess returns.
What does EMH imply about stock prices?
They follow a random walk and are unpredictable.
What is the implication of EMH for mutual fund performance?
Actively managed funds should not consistently outperform the market after costs.
What is the January Effect?
A market anomaly where stocks, especially small-caps, show higher returns in January.
What is momentum in finance?
The tendency of winning stocks to continue performing well in the short term.
What is value investing and how does it challenge EMH?
Buying undervalued stocks; outperformance suggests prices do not fully reflect available information.
What is the joint-hypothesis problem?
Any EMH test also tests the validity of the asset pricing model used.
How does behavioural finance challenge EMH?
It shows that biases and lack of information can lead to price inefficiencies.
Name two investor biases from behavioural finance.
Overreaction and underreaction, often leading to mispricing.
What is the Adaptive Markets Hypothesis (AMH)?
A theory by Andrew Lo suggesting market efficiency evolves over time.
What does EMH say about arbitrage opportunities?
They are quickly exploited and thus don’t persist.
How are event studies used to test EMH?
By examining how quickly and completely prices adjust to new public information.
What does the random walk model imply?
Future price movements are independent of past movements and reflect only new information.
What is Arbitrage?
Buying something for a low price and then selling it almost instantaneously for a higher price.
