Exam 3

Question 1

3 things about efficiency of a market?

Answer 1

Allocational

Operational
-some people argue market is more easily accessible than it used to be

Informational
-some people argue market is already efficient while some people don’t (warren buffet)

Question 2

What are the 3 variants of the Efficient Market’s Hypothesis?k

Answer 2

Weak-form
-all past price movements are fully reflected in stock price

Semi-Strong Form
-All public information is fully reflected in the stock price (means NO insider trading)

Strong-Form
-all relevant information, public or private, is fully reflected in stock price

Question 3

What are the 4 types of Financial Institutions

Answer 3

Depository

• commercial banks
• credit unions (tries to lower interests rates, non-profit organization, DOES NOT pay income taxes)
• savings and loans (thrifts)

Contractual

• pensions funds
• insurance companies

Investments

• Mutual (open-ended) funds
• Mutual (close-ended) funds
• Hedge Funds
• Exchange Traded Funds ETFs
• Real Estate Investment Trusts
• Unit Trusts

Other Institutions 
 -Government agencies
 -Non-despository mortgage institutions 
  mortgage bankers
  mortgage brokers
  mortgage companies
 -Finance Companies
  consumers
  sales 
  leasing

Question 4

What are the 3 types of risk involved with Contractual Financial Institutions

Answer 4

Pension Funds and Insurance companies have:

Objective Risk
-deviation from the norm

Speculative Risk
-risk that is not insurable
-risk that can involve a gain or loss
(EX: gambling)

Pure Risk
-risk that is insurable
-risk that only involves a loss
(EX: your house either burns down or it doesn’t)