06 - Market Efficiency and Behavioural Finance

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  1. Random Walk
    The notion that stock price changes are random and unpredictable.
  2. Efficient Market Hypothesis (EMH)
    Prices of securities fully reflect available information about securities.
  3. Weak Form EMH
    Stock prices already reflect all information contained in the history of past trading.
  4. Strong Form EMH
    Stock prices reflect all relevant information, including inside information.
  5. Semi-strong Form EMH
    Stock prices already reflect all publicly available information.
  6. Technical Analysis
    Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.
  7. Fundamental Analysis
    Analysis of determinants of firm value, such as prospectus for earnings and dividends.
  8. Passive Investment Strategy
    Buying a well-diversified portfolio without attempting to search out mispriced securities.
  9. Index Fund
    Managed fund holding shares in proportion to their representation in a market index (S&P/ASX 300).
  10. Momentum Effect
    The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.
  11. Reversal Effect
    Tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period.
  12. Anomalies
    Patterns of returns that seem to contradict the EMH.
  13. P/E Effect
    Portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.
  14. Small-firm Effect
    Stocks of small firms have earned abnormal returns, primarily in the month of January.
  15. Neglected-firm Effect
    Tendency of investments in stock of less-well-known firms to generate abnormal returns.
  16. Book-to-market Effect
    Tendency for investments in shares of firms with high ratios of book value to market value generate abnormal returns.
  17. Behavioural Finance
    Models of financial markets that emphasise potential implications of psychological factors affecting investor behaviour.
  18. Conservatism Bias
    Bias among investors, whereby they are too slow (too conservative) in updating their beliefs in response to recent evidence.
  19. Representativeness Bias
    People are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly.
  20. Framing
    Behavioural bias whereby decisions are affected by how choices are posed.

    (such as gains (losses) relative to a low (higher) baseline level)
  21. Mental Accounting
    Specific form of framing in which people segregate certain decisions.
  22. Regret Avoidance
    People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.
  23. Prospect Theory
    Behavioural theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth.
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06 - Market Efficiency and Behavioural Finance
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221 - Market Efficiency and Behavioural Finance
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