Stutz031

hypothesis that prices of securities fully reflect available information about securities

The notion that stock price changes are random and unpredictable.   P(t0) = P(t-1)+ E(t)     E=random news

Assertion that stock prices already reflect all information contained in the history of past trading

Assertion that stock prices already reflect all publicly available information

Assertion that stock prices already reflect all relevant information, including inside information

Use of historical trends and patterns in prices to predict future price movements

Research on determinants of stock value, such as earnings and dividend prospects, expectations for future interest rates, and risk of the firm.  Uses current news to value/forecast asset

price level above which it is supposedly unlikely for a stock or stock index to rise

price level below which it is supposedly unlikely for a stock or stock index to fall

Buying a well-diversified portfolio without attempting to search out mispriced securities

tendency of poorly performing stocks and well performing stocks in one period to continue that abnormal performance in following periods

tendency of poorly performing stocks and well performing stocks in one period to experience reversals in the following period

patterns of returns that seem to contradict the efficient market hypothesis

• 1)January Effect-highest return in Jan. (esp. small stocks)
• 2)Book to Mkt Ratios- Value stocks outperform growth stocks on risk adjusted basis
• 3)S-T Momentum- 6 months approx; aka drift)
• 4)L-T Reversal- past winners become losers

Portfolios of low P/E stocks have exhibited higher average risk adjusted returns than high P/E stocks

Tendency of investments in stock of less well known firms to generate abnormal returns

Tendency for investments in shares of firms with high ratios of book value to market value to generate abnormal returns

the force driving efficient prices, mechanism for "correcting" prices

return that differs from required return given the risk level, riskless profit