ECON 422A: FINANCE AND INVESTMENTS

Size: px
Start display at page:

Download "ECON 422A: FINANCE AND INVESTMENTS"

Transcription

1 ECON 422A: FINANCE AND INVESTMENTS LECTURE 10: EXPECTATIONS AND THE INFORMATIONAL CONTENT OF SECURITY PRICES Mu-Jeung Yang Winter 2016 c 2016 Mu-Jeung Yang

2 OUTLINE FOR TODAY I) Informational Efficiency: Neoclasscial vs. Behavioral Economics II) Performance of Mutual Funds

3 Informational Efficiency: Neoclasscial vs. Behavioral Economics

4 INFORMATIONAL EFFICIENCY: THE ISSUES Informational Efficiency: the degree to which security prices reflect available information on assets. Why informational efficiency matters: Asset prices determine risk-compensation and insurance premia, determining costs for households from insuring against (labor income) risk and providing for retirement. Asset prices determine the allocation of capital, so informational efficiency matters for the allocation of capital and hence the economy-wide productivity.

5 NEOCLASSICAL ECONOMICS Rational Expectations: investors make correct guesses on average", i.e. if they make forecasting errors, they are not systematic. Example: investors look at past data from an environment that does not change too much and extrapolate into the future. They will be correct on average as they apply the LLN. Expected Utility: given correct expectations or probabilities from the LLN, investors use state-utility functions to weights good vs. bad states.

6 EFFICIENT MARKET HYPOTHESIS Efficient Market Hypothesis: security prices reflect all current information" on the payoffs, risk and other characteristics of the asset. Weak EMH: current information" includes past price information and all available historical information. Semi-Strong EMH: current information" includes publicly available financial statements, forecasts etc. Strong EMH: current information" includes all information that any person can have, including insider information.

7 BEHAVIORAL ECONOMICS Larry Summers: There are idiots out there. Look around!" Information Processing Biases: Memory bias: overweight of recent observations. Example: Tech stocks in the 2000s. Overconfidence: tendency of decision makers to overestimate the precision of their guesses and own forecasting abilities. Barber and Odean (2001) document that single men trade too actively on their accounts and realize lower returns on their portfolio than women, due to transaction costs. Representativeness-Bias: tendency to extrapolate from few observations Risk Evaluation Biases: Framing: how a risky investment is presented to you matters Regret Avoidance: loosing on unconventional investments induces more disutility. DeBondt and Thaler (1987) argue that high book-to-market value firm are out of favor" and can be considered unconventional investments. Similarily, small firms might be considered relatively unknown are therefore unconventional...

8 TWO IMPOSSIBILITY PROPOSITIONS Impossibility of complete informational inefficiency: In the presence of at least some rational traders, markets cannot be perfectly timed. Suppose you know an asset price increases tomorrow, then rational traders will start buying today so prices already rise today and not tomorrow. Impossibility of complete informational efficiency: Suppose publicly observable asset prices already would incorporate all information. Then if information-acquisition is costly, no trader would have any incentive to research the asset. But then information about the asset would not be incorporated into its price. Bottomline: real markets have some (major) rational traders who operate under costly information acquisition. There must be some rents on the table, the question is whether these are purely temporary and larger than the cost of information acquisition!

9 Performance of Mutual Funds

10 FUND PERFORMANCE AND EFFICIENT MARKETS: BASIC ISSUES Types of equity funds you can invest your money in: Active Portfolio Allocation Strategies: managers actively trade in the market with your money using all types of strategies, including market timing, technical analysis, fundamental analysis etc. You pay a fee for the money manager s services. Passive Portfolio Allocation Strategies: portfolio composition is typically pinned down by a benchmark index like the S&P 500 and only changes if index composition changes. Claim: if the Behavioral Approach to Finance works better, we should see the results by seeing that active portfolio managers easily outperformed passive strategies by exploiting the idiots that Larry Summers referred to.

11 DOES PREDICTABILITY IMPLY INFORMATIONAL INEFFICIENCY? CAPM is an example for predictability: high Beta stocks outperform low Beta stocks. Does this imply markets are not efficient? No! Returns are higher in response to higher common risk! Now if you know that high beta stocks are predicted to go up, why don t people just borrow money and buy high-beta stocks to time the market? Remember: if people buy, then higher stock price today P t would lower capital gains P t+1 P t, lower returns and therefore destroy the forecasted higher return. Answer: With that investment, risk people take is also increasing! This prevents people from buying stocks in large amounts, even as they know that returns will be high!

12 BENCHMARKING Fama: Market Efficiency means that deviations from equilibrium expected returns are unpredictable based on currently available information. But equilibrium expected returns can vary through time in a predictable way, which means price changes need not be entirely random." Should a portfolio manager who earns high returns because he buys high beta stocks be considered a skillful investor? No! Anybody can generate high returns by taking on more common risk! Consequence: CAPM predicts that mutual funds should be compared to the performance of the market portfolio!

13 ACTIVE MANAGEMENT Many mutual funds report very high returns compared to the market portfolio: do active managers deserve their fees? With an average of 2.5 % of returns, management fees are very high! Over a typical lifetime investment horizon (30-40 years), this is means that 80% of compounding returns ends up in the hands of money managers! When in our financial system essentially money managers, marketers of investment products and stock brokers put up zero percent of the capital and assume zero percent of the risk, yet receive fully 80% of the return, something has gone terribly wrong (...) John Bogle, Vanguard

14 BENCHMARKING WITH THE MARKET PORTFOLIO: IMPACT OF FEES

15 BENCHMARKING WITH THE MARKET PORTFOLIO: POST-FEE RETURNS IGNORING SURVIVORSHIP BIAS

16 BENCHMARKING WITH THE MARKET PORTFOLIO: SURVIVORSHIP BIAS Fund category Benchmark Index Percent outperformed All Domestic Equity S&P % All Large-Cap Funds S&P % All Mid-Cap Funds S&P Mid-Cap % All Small-Cap Funds S&P Small-Cap % All Multi-Cap Funds S&P Small Cap % Global Funds S&P Global % International Funds S&P % Emerging Market Funds S&P/IFCI Composite 90.0% TABLE : Fraction of US equity funds outperformed by benchmark, taking survivorship bias into account. Source: Malkiel (2010)

17 BENCHMARKING WITH THE MARKET PORTFOLIO: PERSISTENCE Fund Type AAR, 70s AAR, 80s Top 20 Equity Funds, 70s +19.0% +11.1% Average of all equity funds +10.4% +11.7% TABLE : Top performers of 70s vs. market proxy. Source: Malkiel (2010) Fund Type AAR, 80s AAR, 90s Top 20 Equity Funds, 80s +18.0% +13.7% S&P 500 Index Fund +14.1% +14.9% TABLE : Top performers of 80s vs. market proxy. Source: Malkiel (2010) Fund Type AAR, 90s AAR 00s Top 20 Equity Funds, 90s +18.0% 2.2% S&P 500 Index Fund +14.9% 0.9% TABLE : Top performers of 90s vs. market proxy. Source: Malkiel (2010)

18 CONCLUSION: WARREN BUFFETT AND HEDGE FUNDS This lecture concludes our discussion of risk premia. Bottomline: you should get systematic reward for taking risk. Anything else is random and temporary profits. This is the heart of informational efficiency. Informational efficiency looks pretty much alive and kicking, despite numerous obituaries over the years. Two groups of people who are still not convinced: Hedge Funds and Warren Buffett. For you to think about: is the persistent performance of Warren Buffett a counterexample to market efficiency? Hedge Funds claim to generate Alpha by trading market neutral", i.e. make profits in up and down markets. To evaluate this claim one needs to understand derivatives markets better...

Market Efficiency and Behavioral Finance. Chapter 12

Market Efficiency and Behavioral Finance. Chapter 12 Market Efficiency and Behavioral Finance Chapter 12 Market Efficiency if stock prices reflect firm performance, should we be able to predict them? if prices were to be predictable, that would create the

More information

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two non-overlapping periods should be zero. If not, one could use returns from one period

More information

The Case For Passive Investing!

The Case For Passive Investing! The Case For Passive Investing! Aswath Damodaran Aswath Damodaran! 1! The Mechanics of Indexing! Fully indexed fund: An index fund attempts to replicate a market index. It is relatively simple to create,

More information

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two non-overlapping periods should be zero. If not, one could use returns from one period

More information

Financial Market Efficiency and Its Implications

Financial Market Efficiency and Its Implications Financial Market Efficiency: The Efficient Market Hypothesis (EMH) Financial Market Efficiency and Its Implications Financial markets are efficient if current asset prices fully reflect all currently available

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note

More information

Do Direct Stock Market Investments Outperform Mutual Funds? A Study of Finnish Retail Investors and Mutual Funds 1

Do Direct Stock Market Investments Outperform Mutual Funds? A Study of Finnish Retail Investors and Mutual Funds 1 LTA 2/03 P. 197 212 P. JOAKIM WESTERHOLM and MIKAEL KUUSKOSKI Do Direct Stock Market Investments Outperform Mutual Funds? A Study of Finnish Retail Investors and Mutual Funds 1 ABSTRACT Earlier studies

More information

FIN 432 Investment Analysis and Management Review Notes for Midterm Exam

FIN 432 Investment Analysis and Management Review Notes for Midterm Exam FIN 432 Investment Analysis and Management Review Notes for Midterm Exam Chapter 1 1. Investment vs. investments 2. Real assets vs. financial assets 3. Investment process Investment policy, asset allocation,

More information

ECON4510 Finance Theory Lecture 7

ECON4510 Finance Theory Lecture 7 ECON4510 Finance Theory Lecture 7 Diderik Lund Department of Economics University of Oslo 11 March 2015 Diderik Lund, Dept. of Economics, UiO ECON4510 Lecture 7 11 March 2015 1 / 24 Market efficiency Market

More information

Five Myths of Active Portfolio Management. P roponents of efficient markets argue that it is impossible

Five Myths of Active Portfolio Management. P roponents of efficient markets argue that it is impossible Five Myths of Active Portfolio Management Most active managers are skilled. Jonathan B. Berk 1 This research was supported by a grant from the National Science Foundation. 1 Jonathan B. Berk Haas School

More information

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6 PORTFOLIO MANAGEMENT A. INTRODUCTION RETURN AS A RANDOM VARIABLE E(R) = the return around which the probability distribution is centered: the expected value or mean of the probability distribution of possible

More information

Rate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period

Rate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period Rate of Return Reading: Veronesi, Chapter 7 Investment over a Holding Period Consider an investment in any asset over a holding period from time 0 to time T. Suppose the amount invested at time 0 is P

More information

Lecture 10: Market Efficiency

Lecture 10: Market Efficiency Lecture 10: Market Efficiency Prof. Markus K. Brunnermeier Overview Efficiency concepts EMH implies Martingale Property Evidence I: Return Predictability Mispricing versus Risk-factor Informational (market)

More information

VALUE ADDED INDEXING SM PERSPECTIVES. Top Ten List: Why Passive Investing Wins SUMMARY:

VALUE ADDED INDEXING SM PERSPECTIVES. Top Ten List: Why Passive Investing Wins SUMMARY: VALUE ADDED INDEXING SM PERSPECTIVES Top Ten List: Why Passive Investing Wins SUMMARY: Too often the active vs. passive investing debate focuses only on performance. While research shows passive strategies

More information

Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -15

Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -15 Test3 1. The market value of Charcoal Corporation's common stock is $20 million, and the market value of its riskfree debt is $5 million. The beta of the company's common stock is 1.25, and the market

More information

Proponents of efficient markets argue that it is

Proponents of efficient markets argue that it is Five Myths of Active Portfolio Management Most active managers are skilled. Jonathan B. Berk Proponents of efficient markets argue that it is impossible to beat the market consistently. In support of their

More information

Performance Evaluation on Mutual Funds

Performance Evaluation on Mutual Funds Performance Evaluation on Mutual Funds Dr.G.Brindha Associate Professor, Bharath School of Business, Bharath University, Chennai 600073, India Abstract: Mutual fund investment has lot of changes in the

More information

Key Concepts and Skills

Key Concepts and Skills Chapter 10 Some Lessons from Capital Market History Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand

More information

CHARACTERISTICS OF INVESTMENT PORTFOLIOS PASSIVE MANAGEMENT STRATEGY ON THE CAPITAL MARKET

CHARACTERISTICS OF INVESTMENT PORTFOLIOS PASSIVE MANAGEMENT STRATEGY ON THE CAPITAL MARKET Mihaela Sudacevschi 931 CHARACTERISTICS OF INVESTMENT PORTFOLIOS PASSIVE MANAGEMENT STRATEGY ON THE CAPITAL MARKET MIHAELA SUDACEVSCHI * Abstract The strategies of investment portfolios management on the

More information

Active U.S. Equity Management THE T. ROWE PRICE APPROACH

Active U.S. Equity Management THE T. ROWE PRICE APPROACH PRICE PERSPECTIVE October 2015 Active U.S. Equity Management THE T. ROWE PRICE APPROACH In-depth analysis and insights to inform your decision-making. EXECUTIVE SUMMARY T. Rowe Price believes that skilled

More information

Risk, Return and Market Efficiency

Risk, Return and Market Efficiency Risk, Return and Market Efficiency For 9.220, Term 1, 2002/03 02_Lecture16.ppt Student Version Outline 1. Introduction 2. Types of Efficiency 3. Informational Efficiency 4. Forms of Informational Efficiency

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions.

More information

S T H EIG E H H SCALING THE HEIGHTS I WITH EXCHANGE TRADED FUNDS T G LIN A SC

S T H EIG E H H SCALING THE HEIGHTS I WITH EXCHANGE TRADED FUNDS T G LIN A SC PROFESSIONALLY MANAGED INVESTMENT SOLUTIONS THROUGH EXCHANGE TRADED FUNDS SCALING THE HEIGHTS SCALING THE HEIGHTS I WITH EXCHANGE TRADED FUNDS AN ETF-BASED DISCIPLINED PROCESS TO HELP YOU ACHIEVE YOUR

More information

Portfolio Performance Measures

Portfolio Performance Measures Portfolio Performance Measures Objective: Evaluation of active portfolio management. A performance measure is useful, for example, in ranking the performance of mutual funds. Active portfolio managers

More information

Index investing. A simple, low-cost solution for retirement plans

Index investing. A simple, low-cost solution for retirement plans Index investing A simple, low-cost solution for retirement plans Index investing: A simple, low-cost solution for retirement plans Despite the challenging economic conditions of the last few years, employers

More information

1 2 3 4 5 6 Say that you need to generate $4,000 per month in retirement and $1,000 will come from social security and you have no other pension. This leaves $3,000 per month, or $36,000 per year, that

More information

Our Interview with William F. Sharpe

Our Interview with William F. Sharpe Our Interview with William F. Sharpe William F. Sharpe is a Professor of Finance, Emeritus at Stanford University s Graduate School of Business. He was one of the originators of the Capital Asset Pricing

More information

What Level of Incentive Fees Are Hedge Fund Investors Actually Paying?

What Level of Incentive Fees Are Hedge Fund Investors Actually Paying? What Level of Incentive Fees Are Hedge Fund Investors Actually Paying? Abstract Long-only investors remove the effects of beta when analyzing performance. Why shouldn t long/short equity hedge fund investors

More information

Chapter 7 Risk, Return, and the Capital Asset Pricing Model

Chapter 7 Risk, Return, and the Capital Asset Pricing Model Chapter 7 Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE 1. Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios should she hold

More information

Building and Interpreting Custom Investment Benchmarks

Building and Interpreting Custom Investment Benchmarks Building and Interpreting Custom Investment Benchmarks A White Paper by Manning & Napier www.manning-napier.com Unless otherwise noted, all fi gures are based in USD. 1 Introduction From simple beginnings,

More information

MANAGED FUTURES AND HEDGE FUNDS: A MATCH MADE IN HEAVEN

MANAGED FUTURES AND HEDGE FUNDS: A MATCH MADE IN HEAVEN JOIM JOURNAL OF INVESTMENT MANAGEMENT, Vol. 2, No. 1, (4), pp. 1 9 JOIM 4 www.joim.com MANAGED FUTURES AND HEDGE FUNDS: A MATCH MADE IN HEAVEN Harry M. Kat In this paper we study the possible role of managed

More information

The relationship between exchange rates, interest rates. In this lecture we will learn how exchange rates accommodate equilibrium in

The relationship between exchange rates, interest rates. In this lecture we will learn how exchange rates accommodate equilibrium in The relationship between exchange rates, interest rates In this lecture we will learn how exchange rates accommodate equilibrium in financial markets. For this purpose we examine the relationship between

More information

Offering you a balanced view of active and passive investing

Offering you a balanced view of active and passive investing Active vs. passive mutual fund investing Guide Offering you a balanced view of active and passive investing Learn more about these two strategies and find out whether one or a combination of both may be

More information

Factoring In Value and Momentum in the US Market

Factoring In Value and Momentum in the US Market For Financial Professional Use Only Factoring In and in the US Market Morningstar Research Paper January 2014 Paul Kaplan, Ph.D., CFA Director of Research, Morningstar Canada +1 416 484-7824 paul.kaplan@morningstar.com

More information

Glossary of Investment Terms

Glossary of Investment Terms online report consulting group Glossary of Investment Terms glossary of terms actively managed investment Relies on the expertise of a portfolio manager to choose the investment s holdings in an attempt

More information

Midterm Exam:Answer Sheet

Midterm Exam:Answer Sheet Econ 497 Barry W. Ickes Spring 2007 Midterm Exam:Answer Sheet 1. (25%) Consider a portfolio, c, comprised of a risk-free and risky asset, with returns given by r f and E(r p ), respectively. Let y be the

More information

SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

More information

Investor Performance in ASX shares; contrasting individual investors to foreign and domestic. institutions. 1

Investor Performance in ASX shares; contrasting individual investors to foreign and domestic. institutions. 1 Investor Performance in ASX shares; contrasting individual investors to foreign and domestic institutions. 1 Reza Bradrania a*, Andrew Grant a, P. Joakim Westerholm a, Wei Wu a a The University of Sydney

More information

Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required

More information

I.e., the return per dollar from investing in the shares from time 0 to time 1,

I.e., the return per dollar from investing in the shares from time 0 to time 1, XVII. SECURITY PRICING AND SECURITY ANALYSIS IN AN EFFICIENT MARKET Consider the following somewhat simplified description of a typical analyst-investor's actions in making an investment decision. First,

More information

SUMMARY. a) Theoretical prerequisites of Capital Market Theory b) Irrational behavior of investors. d) Some empirical evidence in recent years

SUMMARY. a) Theoretical prerequisites of Capital Market Theory b) Irrational behavior of investors. d) Some empirical evidence in recent years 1 SUMMARY a) Theoretical prerequisites of Capital Market Theory b) Irrational behavior of investors c) The influence on risk profile d) Some empirical evidence in recent years e) Behavioral finance and

More information

Advanced Strategies for Managing Volatility

Advanced Strategies for Managing Volatility Advanced Strategies for Managing Volatility Description: Investment portfolios are generally exposed to volatility through company-specific risk and through market risk. Long-term investors can reduce

More information

Intro on Hedge Funds AQF-2005

Intro on Hedge Funds AQF-2005 Intro on Hedge Funds AQF-2005 1 Hedge Funds What are hedge funds? Why is their performance measurement different from that of regular mutual funds? How should we analyze their performance? 2 What is a

More information

The efficient market hypothesis and the design of investment activity

The efficient market hypothesis and the design of investment activity The efficient market hypothesis and the design of investment activity 1 How should one design an investment strategy? One option: active trading based on Information ( news ) Market trends ( momentum )

More information

Wel Dlp Portfolio And Risk Management

Wel Dlp Portfolio And Risk Management 1. In case of perfect diversification, the systematic risk is nil. Wel Dlp Portfolio And Risk Management 2. The objectives of investors while putting money in various avenues are:- (a) Safety (b) Capital

More information

Financial Market Microstructure Theory

Financial Market Microstructure Theory The Microstructure of Financial Markets, de Jong and Rindi (2009) Financial Market Microstructure Theory Based on de Jong and Rindi, Chapters 2 5 Frank de Jong Tilburg University 1 Determinants of the

More information

Stock Returns Following Profit Warnings: A Test of Models of Behavioural Finance.

Stock Returns Following Profit Warnings: A Test of Models of Behavioural Finance. Stock Returns Following Profit Warnings: A Test of Models of Behavioural Finance. G. Bulkley, R.D.F. Harris, R. Herrerias Department of Economics, University of Exeter * Abstract Models in behavioural

More information

Cash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)

Cash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568) Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 5,670 6,808 5,788 6,928 Variable

More information

Market Efficiency: Definitions and Tests. Aswath Damodaran

Market Efficiency: Definitions and Tests. Aswath Damodaran Market Efficiency: Definitions and Tests 1 Why market efficiency matters.. Question of whether markets are efficient, and if not, where the inefficiencies lie, is central to investment valuation. If markets

More information

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3 MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

More information

Foundations of Asset Management Goal-based Investing the Next Trend

Foundations of Asset Management Goal-based Investing the Next Trend Foundations of Asset Management Goal-based Investing the Next Trend Robert C. Merton Distinguished Professor of Finance MIT Finance Forum May 16, 2014 #MITSloanFinance 1 Agenda Goal-based approach to investment

More information

Mid-Cap Stocks: Opportunities in the Heart of the Market

Mid-Cap Stocks: Opportunities in the Heart of the Market APRIL 212 Mid-Cap Stocks: Opportunities in the Heart of the Market by Jonathan R. Cain, CFA, David J. Gullen, CFA, and Steven L. Pollack, CFA The John Hancock White Paper Series provides in-depth commentary

More information

It is a market where current prices reflect/incorporate all available information.

It is a market where current prices reflect/incorporate all available information. ECMC49F Market Efficiency Hypothesis Practice Questions Date: Nov 15, 2005 [1] How to define an efficient market? It is a market where current prices reflect/incorporate all available information. [2]

More information

Market Seasonality Historical Data, Trends & Market Timing

Market Seasonality Historical Data, Trends & Market Timing Market Seasonality Historical Data, Trends & Market Timing We are entering what has historically been the best season to be invested in the stock market. According to Ned Davis Research if an individual

More information

Chap 3 CAPM, Arbitrage, and Linear Factor Models

Chap 3 CAPM, Arbitrage, and Linear Factor Models Chap 3 CAPM, Arbitrage, and Linear Factor Models 1 Asset Pricing Model a logical extension of portfolio selection theory is to consider the equilibrium asset pricing consequences of investors individually

More information

Stock Market -Trading and market participants

Stock Market -Trading and market participants Stock Market -Trading and market participants Ruichang LU ( 卢 瑞 昌 ) Department of Finance Guanghua School of Management Peking University Overview Trading Stock Understand trading order Trading cost Margin

More information

1. An IRA with a bank with the funds deposited in a variable-rate account.

1. An IRA with a bank with the funds deposited in a variable-rate account. Unit 11 Cases. Case 1. Goals and Portfolio Selection (P.891) Vanessa Avoletta is a very successful self-employed freelance writer of romantic novels. She has a reputation for writing rapidly and is able

More information

Mutual Fund Performance

Mutual Fund Performance Mutual Fund Performance When measured before expenses passive investors who simply hold the market portfolio must earn zero abnormal returns. This means that active investors as a group must also earn

More information

The Theory of Investment

The Theory of Investment CHAPTER 17 Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: leading theories to explain each type of investment why investment is negatively

More information

Compelling Evidence That Active Management Really Works By Ken Solow June 23, 2009

Compelling Evidence That Active Management Really Works By Ken Solow June 23, 2009 Compelling Evidence That Active Management Really Works By Ken Solow June 23, 2009 Ken Solow, CFP, is a Founding Principal and Chief Investment Officer with Pinnacle Advisory Group, a Registered Investment

More information

FUNDING INVESTMENTS FINANCE 738, Spring 2008, Prof. Musto Class 4 Market Making

FUNDING INVESTMENTS FINANCE 738, Spring 2008, Prof. Musto Class 4 Market Making FUNDING INVESTMENTS FINANCE 738, Spring 2008, Prof. Musto Class 4 Market Making Only Game In Town, by Walter Bagehot (actually, Jack Treynor) Seems like any trading idea would be worth trying Tiny amount

More information

Trading Costs and Taxes!

Trading Costs and Taxes! Trading Costs and Taxes! Aswath Damodaran Aswath Damodaran! 1! The Components of Trading Costs! Brokerage Cost: This is the most explicit of the costs that any investor pays but it is usually the smallest

More information

Applied Economics For Managers Recitation 5 Tuesday July 6th 2004

Applied Economics For Managers Recitation 5 Tuesday July 6th 2004 Applied Economics For Managers Recitation 5 Tuesday July 6th 2004 Outline 1 Uncertainty and asset prices 2 Informational efficiency - rational expectations, random walks 3 Asymmetric information - lemons,

More information

Economia Aziendale online 2000 Web International Business and Management Review

Economia Aziendale online 2000 Web International Business and Management Review Economia Aziendale online 2000 Web International Business and Management Review N. 1/2008 Special Issue 3 rd International Economic Scientific Session International Scientific Conference European Integration

More information

Tilted Portfolios, Hedge Funds, and Portable Alpha

Tilted Portfolios, Hedge Funds, and Portable Alpha MAY 2006 Tilted Portfolios, Hedge Funds, and Portable Alpha EUGENE F. FAMA AND KENNETH R. FRENCH Many of Dimensional Fund Advisors clients tilt their portfolios toward small and value stocks. Relative

More information

The Concentration Crisis

The Concentration Crisis WEALTHCARE CAPITAL MANAGEMENT: white paper The Concentration Crisis Risk Without Reward David B. Loeper, CIMA Chairman/CEO 6 East Main Street, Richmond, VA 23219 p 84.644.4711 f 84.644.4759 www.wealthcarecapital.com

More information

Should You Hire a Financial Advisor? Jeff Speakes. Copy write 2015. Table of Contents

Should You Hire a Financial Advisor? Jeff Speakes. Copy write 2015. Table of Contents Should You Hire a Financial Advisor? Jeff Speakes Copy write 2015 Table of Contents 1. Can a Novice Beat a Pro? 2. Vanguard 3. Asset Pricing Theory 4. Wealthfront 5. Fundamental Indexing (and other market

More information

Contents. 1 Asset allocation 2 Sub-asset allocation 3 Active/passive combinations 4 Asset location

Contents. 1 Asset allocation 2 Sub-asset allocation 3 Active/passive combinations 4 Asset location ETF Strategies Contents Why ETFs? Strategic uses for ETFs 1 Asset allocation 2 Sub-asset allocation 3 Active/passive combinations 4 Asset location Tactical uses for ETFs 1 Portfolio completion 2 Cash

More information

RISK ASSESSMENT QUESTIONNAIRE

RISK ASSESSMENT QUESTIONNAIRE Time Horizon 6/14 Your current situation and future income needs. 1. What is your current age? 2. When do you expect to start drawing income? A Less than 45 A Not for at least 20 years B 45 to 55 B In

More information

Investment Philosophies: Introduction

Investment Philosophies: Introduction Investment Philosophies: Introduction Aswath Damodaran www.damodaran.com Aswath Damodaran! 1! What is an investment philosophy? What is it? An investment philosophy is a coherent way of thinking about

More information

The Best Mutual Funds: DFA or Vanguard?

The Best Mutual Funds: DFA or Vanguard? The Best Mutual Funds: DFA or Vanguard? The most important favor that long-term investors can do for themselves is to invest in the right kinds of assets, or asset classes. Examples of asset classes are

More information

Basic Investment Education

Basic Investment Education Disclaimer: The information provided below is for information purposes only - it is not investment advice. If you have any questions about your own personal financial situation, you should consult with

More information

Investment Research: How Much is Enough?

Investment Research: How Much is Enough? Copyright Oxford Management Publishing 2009 Investment Research: How Much is Enough? Bradford Cornell Abstract Aside from the decision to enter the equity market, the most fundamental question an investor

More information

Finding outperforming managers. Randolph B. Cohen Harvard Business School

Finding outperforming managers. Randolph B. Cohen Harvard Business School Finding outperforming managers Randolph B. Cohen Harvard Business School 1 Conventional wisdom holds that: Managers can t pick stocks and therefore don t beat the market It s impossible to pick winning

More information

For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return. 2.

For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return. 2. For both risk and return, increasing order is b, c, a, d. On average, higher risk of an investment, higher is its expected return. 2. Since price didn t change, capital gains yield was zero. If total return

More information

A Review of Cross Sectional Regression for Financial Data You should already know this material from previous study

A Review of Cross Sectional Regression for Financial Data You should already know this material from previous study A Review of Cross Sectional Regression for Financial Data You should already know this material from previous study But I will offer a review, with a focus on issues which arise in finance 1 TYPES OF FINANCIAL

More information

ECON 351: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

ECON 351: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis ECON 351: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis Alejandro Riaño Penn State University June 8, 2008 Alejandro Riaño (Penn State University) ECON 351:

More information

The Paper is certainly with good intent. But it is not able to address the fundamental problems of existing MPF schemes:

The Paper is certainly with good intent. But it is not able to address the fundamental problems of existing MPF schemes: Opinion on Providing Better Investment Solutions for MPF Members Consultation Paper (hereafter referred as the Paper) issued by the Mandatory Provident Fund Schemes Authority (hereafter referred as the

More information

Instructor s Manual Chapter 12 Page 144

Instructor s Manual Chapter 12 Page 144 Chapter 12 1. Suppose that your 58-year-old father works for the Ruffy Stuffed Toy Company and has contributed regularly to his company-matched savings plan for the past 15 years. Ruffy contributes $0.50

More information

WHAT I LEARNT AS AN INVESTOR

WHAT I LEARNT AS AN INVESTOR WHAT I LEARNT AS AN INVESTOR BY GUERRIC DE TERNAY We all want to make money by investing our savings but investment seems confusing. We do not know how to organize our investment. Where should we start?

More information

EXTRAPOLATION BIAS: INSIDER TRADING IMPROVEMENT SIGNAL

EXTRAPOLATION BIAS: INSIDER TRADING IMPROVEMENT SIGNAL EXTRAPOLATION BIAS: INSIDER TRADING IMPROVEMENT SIGNAL HIGHLIGHTS Consistent with previous studies, we find that knowledge of insider trading is valuable to non-insider investors. We find that the change

More information

Learn about exchange-traded funds. Investor education

Learn about exchange-traded funds. Investor education Learn about exchange-traded funds Investor education Become a more knowledgeable exchange-traded funds investor In this education guide, you ll get answers to common questions about exchange-traded funds,

More information

GLOSSARY OF INVESTMENT-RELATED TERMS FOR NATIONAL ELECTRICAL ANNUITY PLAN PARTICIPANTS

GLOSSARY OF INVESTMENT-RELATED TERMS FOR NATIONAL ELECTRICAL ANNUITY PLAN PARTICIPANTS GLOSSARY OF INVESTMENT-RELATED TERMS FOR NATIONAL ELECTRICAL ANNUITY PLAN PARTICIPANTS General Information This Glossary of Investment-Related Terms for National Electrical Annuity Plan Participants (the

More information

STATEMENT OF INVESTMENT BELIEFS AND PRINCIPLES

STATEMENT OF INVESTMENT BELIEFS AND PRINCIPLES STATEMENT OF INVESTMENT BELIEFS AND PRINCIPLES Investment Advisory Board, Petroleum Fund of Timor-Leste August 2014 CONTENTS Page Summary... 1 Context... 3 Mission Statement... 4 Investment Objectives...

More information

CHOOSING YOUR INVESTMENTS

CHOOSING YOUR INVESTMENTS CHOOSING YOUR INVESTMENTS FOR ASSISTANCE CONTACT US TODAY FOR MORE INFORMATION, ADVICE OR HELP OPENING AN ACCOUNT, IT S EASY TO REACH US: BY PHONE Call us at 800 TIAA-CREF (800 842-2273) to speak with

More information

Alpha - the most abused term in Finance. Jason MacQueen Alpha Strategies & R-Squared Ltd

Alpha - the most abused term in Finance. Jason MacQueen Alpha Strategies & R-Squared Ltd Alpha - the most abused term in Finance Jason MacQueen Alpha Strategies & R-Squared Ltd Delusional Active Management Almost all active managers claim to add Alpha with their investment process This Alpha

More information

Money and Banking Prof. Yamin Ahmad ECON 354 Spring 2006

Money and Banking Prof. Yamin Ahmad ECON 354 Spring 2006 Money and Banking Prof. Yamin Ahmad ECON 354 Spring 2006 Final Exam Name Id # Instructions: There are 30 questions on this exam. Please circle the correct solution on the exam paper and fill in the relevant

More information

Active vs. Passive Asset Management Investigation Of The Asset Class And Manager Selection Decisions

Active vs. Passive Asset Management Investigation Of The Asset Class And Manager Selection Decisions Active vs. Passive Asset Management Investigation Of The Asset Class And Manager Selection Decisions Jianan Du, Quantitative Research Analyst, Quantitative Research Group, Envestnet PMC Janis Zvingelis,

More information

Research Summary Saltuk Ozerturk

Research Summary Saltuk Ozerturk Research Summary Saltuk Ozerturk A. Research on Information Acquisition in Markets and Agency Issues Between Investors and Financial Intermediaries An important dimension of the workings of financial markets

More information

The Hidden Costs of Changing Indices

The Hidden Costs of Changing Indices The Hidden Costs of Changing Indices Terrence Hendershott Haas School of Business, UC Berkeley Summary If a large amount of capital is linked to an index, changes to the index impact realized fund returns

More information

2. How is a fund manager motivated to behave with this type of renumeration package?

2. How is a fund manager motivated to behave with this type of renumeration package? MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff

More information

AFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang

AFM 472. Midterm Examination. Monday Oct. 24, 2011. A. Huang AFM 472 Midterm Examination Monday Oct. 24, 2011 A. Huang Name: Answer Key Student Number: Section (circle one): 10:00am 1:00pm 2:30pm Instructions: 1. Answer all questions in the space provided. If space

More information

Investments 2: Creating a Personal Investment Plan. Assignments

Investments 2: Creating a Personal Investment Plan. Assignments Financial Plan Assignments Assignments Open your copy of Learning Tool 5A: Investment Plan Example. Make sure you understand the terminology related to investment plans. I will discuss many aspects of

More information

Smart Beta Theory and Practice

Smart Beta Theory and Practice Smart Beta Theory and Practice Burton G Malkiel Chemical Bank of Chairman s Professor of Economics, emeritus Princeton University November 5, 2014 RCI Rogers Investment Innovations Conference 2014 1 What

More information

Passive Investment Strategies and Efficient Markets

Passive Investment Strategies and Efficient Markets European Financial Management, Vol. 9, No. 1, 2003, 1 10 Passive Investment Strategies and Efficient Markets Burton G. Malkiel Princeton University e-mail: bmalkiel@princeton.edu Abstract This paper presents

More information

Overview of Your TIAA-CREF Investment Solutions SM Accounts

Overview of Your TIAA-CREF Investment Solutions SM Accounts Overview of Your TIAA-CREF Investment Solutions SM Accounts TIAA-CREF Investment Solutions SM now offers you nine mutual funds in addition to our fixed and variable annuity accounts. TIAA-CREF Investment

More information

An Intermarket Approach to Beta Rotation

An Intermarket Approach to Beta Rotation An Intermarket Approach to Beta Rotation The Strategy, Signal, and Power of Utilities Market Technicians Association An Intermarket Approach to Beta Rotation Charles V. Bilello, CMT Michael A. Gayed, CFA

More information

Best Styles: Harvesting Risk Premium in Equity Investing

Best Styles: Harvesting Risk Premium in Equity Investing Strategy Best Styles: Harvesting Risk Premium in Equity Investing Harvesting risk premiums is a common investment strategy in fixed income or foreign exchange investing. In equity investing it is still

More information

Lecture 5: Forwards, Futures, and Futures Options

Lecture 5: Forwards, Futures, and Futures Options OPTIONS and FUTURES Lecture 5: Forwards, Futures, and Futures Options Philip H. Dybvig Washington University in Saint Louis Spot (cash) market Forward contract Futures contract Options on futures Copyright

More information

The Real Business Cycle model

The Real Business Cycle model The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian

More information