Chapter 7
How does the CAPM equation look like?
E(r) = risk-free rate + risk premium + error
Which form of the EMH includes all public available information?
Semi-strong form
What is the Disposition effect?
The reluctance to realize losses
Would the risk premium of a company with a higher than average book-to-market ratio be above or below industry average?
above - higher book-to-market ratio could result in higher distress.
What kind of information lead to changes in stock prices?
New and unpredictable information
What three limits to arbitrage allow for mispricing to persist over a long horizon?
1. Fundamental Risk
2. Model Risk
3. Implementation cost
Which two core implications of CAPM remain highly relevant?
1. Distinction between diversifiable and systematic risk
2. Investors will demand a premium for bearing systematic risk
For which is the alpha typically slightly positive before, and slightly negative after fees?
Mutual fund returns
That people actually make a difference