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06 - Market Efficiency and Behavioural Finance
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Random Walk
The notion that stock price changes are random and unpredictable.
Efficient Market Hypothesis (EMH)
Prices of securities fully reflect available information about securities.
Weak Form EMH
Stock prices already reflect all information contained in the history of past trading.
Strong Form EMH
Stock prices reflect all relevant information, including inside information.
Semi-strong Form EMH
Stock prices already reflect all publicly available information.
Technical Analysis
Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.
Fundamental Analysis
Analysis of determinants of firm value, such as prospectus for earnings and dividends.
Passive Investment Strategy
Buying a well-diversified portfolio without attempting to search out mispriced securities.
Index Fund
Managed fund holding shares in proportion to their representation in a market index (S&P/ASX 300).
Momentum Effect
The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.
Reversal Effect
Tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in the following period.
Anomalies
Patterns of returns that seem to contradict the EMH.
P/E Effect
Portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.
Small-firm Effect
Stocks of small firms have earned abnormal returns, primarily in the month of January.
Neglected-firm Effect
Tendency of investments in stock of less-well-known firms to generate abnormal returns.
Book-to-market Effect
Tendency for investments in shares of firms with high ratios of book value to market value generate abnormal returns.
Behavioural Finance
Models of financial markets that emphasise potential implications of psychological factors affecting investor behaviour.
Conservatism Bias
Bias among investors, whereby they are too slow (too conservative) in updating their beliefs in response to recent evidence.
Representativeness Bias
People are too prone to believe that a small sample is representative of a broad population and infer patterns too quickly.
Framing
Behavioural bias whereby decisions are affected by how choices are posed.
(such as gains (losses) relative to a low (higher) baseline level)
Mental Accounting
Specific form of framing in which people segregate certain decisions.
Regret Avoidance
People blame themselves more for unconventional choices that turn out badly so they avoid regret by making conventional decisions.
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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Author
Lea_
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318918
Card Set
06 - Market Efficiency and Behavioural Finance
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221 - Market Efficiency and Behavioural Finance
Updated
2016-04-15T00:33:07Z
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