Fin 331 Final Exam, Spring 2008
Chapter 8, The Efficient Market Hypothesis
1. Explain why price changes are random, but price levels are not random in an efficient market.
2. Define the “law of one price.”
3. Define arbitrage and explain why opportunities for arbitrage do not persist in an efficient market.
4. Define weak form market efficiency and explain why technical analysis is not beneficial if markets are weak form efficient.
5. Define semi-strong form market efficiency and explain why fundamental analysis is not beneficial if markets are semi-strong form efficient.
6. Define strong form market efficiency and explain why inside information is not beneficial if markets are strong form efficient.
7. Summarize empirical evidence relating to market efficiency.
8. Identify four “anomalies” and explain their significance for the EMH.
9. State the investment implications of an efficient market.
Ch 14, Options
Characteristics of traded options
Characteristics of Employee stock options
Calculate the payoff at expiration of a call option
Calculate the gain or loss that results from sale or purchase of a call option
Ch 9, Bond Prices and Yields
Bond characteristics
Calculate bond price
Calculate bond yields:
Yield to maturity
Yield to call
Realized compound yield
Bond ratings: determinants and use
Ch 10, Managing Bond Portfolios
Impacts of a change in market interest rates on bondholders
Macaulay's duration: calculation and use
Modified duration: calculation and use
Bond trading strategies
Chapter 19, Behavioral Finance
Behavioral tendencies that interfere with rational decision making:
Overconfidence
Endowment effect
Loss aversion
Pain of regret
Mental accounting
Unrealistic probabilities
Unreasonable discount rates
Why do investors tend to keep losers too long? What can an investor do to avoid the tendency?
How does overconfidence adversely affect investment decision making?
Chapter 19, Technical Analysis
Types of technical analysis:
Charting
Market structure
Sentiment
Flow of funds
Charting: Dow theory
Market structure: breadth
Examples and interpretation of sentiment indicators
Examples and interpretation of flow of funds indicators
Investment scams
How to recognize a scam
Types of scams
Study Questions for Chapter 17 of Stocks for the Long Run by Jeremy Siegel:
What is the 200-day moving average of stock prices? Briefly explain how technical analysts use the 200-day moving average to decide when to get out of the stock market and when to get into the stock market. Based on the 1886-2001 period for the Dow Jones Industrial Average, after transaction costs are taken into account, were returns higher from a simple buy-and-hold strategy, or from following the 200-day moving average market timing strategy? Which strategy resulted in lower risk?
Study Questions for The Psychology of Investing by John Nofsinger:
Chapter 2
What evidence exists that most people are overconfident of their abilities? In what ways does overconfidence affect investing behavior and investment results?
Chapter 7
Define representativeness. In what ways does representativeness affect investing behavior and investment results?
How is familiarity characterized by Prof. Nofsinger? In what ways does familiarity affect investing behavior and investment results?
Study Questions for Chapter 7 of Irrational Exuberance, by Robert Shiller
1. What does Shiller mean by "quantitative anchors?" Give an example of a quantitative anchor investors might use.
2. What does Shiller mean by "moral anchors?" Give an example of how moral anchors might affect investor actions.