Chapter 7-8 Finance Midterm

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1
Arbitrage
creation of riskless profits made possible by relative mispricing among securities.
2
Arbitrage Pricing theory
a theory of risk-return relationships derived from no-arbitrage considerations in large capital markets.
3
Capital Asset Pricing Model (CAPM)
a model that relates the required rate of return on a security to its systematic risk as measured by beta.
4
Expected return-beta relationship
implication of the CAPM that security risk premiums should be proportional to beta.
5
factor portfolio
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.
6
multifactor model
models of security markets positing that returns respond to several systematic factors.
7
Anomalies
patterns of returns that seem to contradict the efficient market hypothesis.
8
Book-to-market effect
the tendency for investments in shares of firms with high ratios of book value to market value to generate abnormal returns.
9
size-effect
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.
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
efficient market hypothesis
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
12
Fundamental Analysis
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.
13
Index Fund
a mutual fund holding shares in proportion to their representation in a market index such as the S&P 500
14
Passive investment strategy
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.
15
Random Walk
the notion that stock price changes are random and unpredictable
16
Technical Analysis
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.
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