Week 1 - Investing Basics and Market Efficiency

What is a collection of assets held by an investor, including stocks, bonds, or real estate?

Example: 50% stocks, 30% bonds, 20% REITS

• Valuation

• Portfolio

• Primary Market

• Secondary Market

What is a purchase of new capital goods that increase productive capacity?

Example: A company buys new machinery

• Value

• Investment (Lay Terms)

• Investments (Economics)

• Portfolio

When stock prices continue to drift upward or downward after earnings announcements rather than adjusting fully immediately?

Example: After beating earnings expectations, a stock continues rising for weeks

• Random Walk

• Overreaction Effect

• Drift Effect

• Technical Analysis

When investors overreact to news, causing prices to overshoot and later reverse?

Example: A bad earnings announcements causes a stock to drop sharply, then rebound as the market corrects

• Small Effect

• Drift Effect

• Overreaction Effect

• January Effect

What is it called when smaller firms tend to earn higher risk-adjusted returns than larger firms?

Example: Micro-cap stocks outperform S&P 500 companies in some periods

• Day-of-the-week Effect

• January Effect

• Small Firm Effect

• Neglected Firm Effect

Stocks, especially, small-cap, often experience higher returns in January

Example: Investors buying in late December to sell in January to capture seasonal gains

• Market Anomalies

• Neglected-Firm Effect

• January Effect

• Day of the Week Effect

When lesser-known or lightly followed firms may provide superior returns because fewer analysts follow them.

Example: A small regional bank stock not covered by Wall Street analyst yield outsized returns

• Day of the Week Effect

• Overreaction Effect

• Neglected Firm Effect

• Drift Effect

Stocks returns tend to be systematically higher or lower on certain days

Example: Historically, Monday returns have been lower compared to Friday returns

• January Effect

• Neglected Firm Effect

• Day of the Week Effect

• Small-Firm Effect

What is the extent to which prices reflect all information?

Example: Apple announces earnings then stocks react immediately.

• Allocation

• Semi-Strong Form Efficiency

• Market Efficiency

• Weak-Form Efficiency

The theory that security prices fully reflect all available information. Major assumptions include:

(1) A large number of profit maximizing investors analyzing and valuing securities.

(2) Information is freely available to all investors

(3) Prices adjust rapidly to new information

• Market Efficiency

• Weak-Form Efficiency

• Efficient Market Hypothesis

• Semi-Strong Form Efficiency