Chapter 7-8 Finance Midterm

creation of riskless profits made possible by relative mispricing among securities.

a theory of risk-return relationships derived from no-arbitrage considerations in large capital markets.

a model that relates the required rate of return on a security to its systematic risk as measured by beta.

implication of the CAPM that security risk premiums should be proportional to beta.

a well-diversified portfolio constructed to have a beta of 1 on one factor and a beta of 0 on any other factor

it is a well-diversifed investment that is designed to follow the performance of one specific factor (like the overall market or particular sector) while having no influence from any other factors.

models of security markets positing that returns respond to several systematic factors.

patterns of returns that seem to contradict the efficient market hypothesis.

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

refers to the tendency for smaller companies (small-cap stocks) to outperform larger companies (large-cap stocks) in terms of investment returns over time. This phenomenom suggests that smaller companies often offer higher growth potential, but they also come at higher risk.

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

the hypothesis that prices of securities fully reflect available information about securities.

weak form- the assertion that stock prices already reflect all information contained in the history of past trading.

semistrong-form- the assertion that stock prices already reflect all publicly available information.

strong-form- the assertion that stocks prices reflect all relevant information, including inside information

research on determinants of stock value, such as earnings and dividend prospects, expectations for future interest rates, and risk of the firm.

is a method used to determine a stock’s true value (or intrinsic value) by looking at a company’s financial health and overall business performance.

a mutual fund holding shares in proportion to their representation in a market index such as the S&P 500

involves buying and holding investments (such as stocks, bonds, or mutual funds) for long term, with minimal buying and selling. The goal is to match, rather than outperform, the market.

the notion that stock price changes are random and unpredictable

research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.

chartism- focusing on studying charts and patterns to predict future stock price movements.