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FIN 302 (21)
Lecture 24

FIN 302 Lecture 24: Session 24
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3 Pages
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Department
Finance
Course Code
FIN 302
Professor
Denis Sosyura

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SESSION 24: EFFICIENT MARKET, ANOMALIES, AND INVESTING, PART 2 - Long-run test of market efficiency - Investment performance of stock recommendations by professional analysts - Mini-case: Illustration of investor biases - Implications for investing and portfolio tax management STOCK RECOMMENDATIONS AND MARKET EFFICIENCY - Investment advisors devote their lives to making stock recommendations and searching for underpriced assets - Can we profit from the prophets? If so, this would be strong evidence against market efficiency ANALYST RECOMMENDATIONS - Given the market attention to stock analysts, can we make money by following their recommendations (buy/hold/sell)? - Strategy - Purchase stocks with the most favorable recommendations and short-sell stocks with least favorable recommendations - Same-day response to recommendation changes - Performance - Annual return of 4%, but very high turnover: > 400% - Conclusion - After considering transaction costs, the net return on the strategy is not statistically different from zero - Focus on the “strong” recommendations from the Analysis - 4% - Following the accommodations of the stock analysts are not always the best for obtaining persistent returns. RECOMMENDATIONS BY JIM CRAMER - Jim Cramer’s books have sold over a million copies, and his show is watched by 400,000 viewers per night - Strategy Evaluation - Cramer’s stock picks favor high-beta firms - Cramer’s recommendations experience higher trading volume and a short-lived increase in price, which quickly reverses - Performance - Risk-adjusted returns are not significantly different from zero - Conclusion - Do Jim Cramer’s recommendations provide value? IN-CLASS REVIEW: CAPM AND EFFICIENT MARKETS - In 2007, Cramer claimed that his stock picks had outperformed the S&P 500 index 63% of the time - Yet empirical evidence shows that his risk-adjusted returns are not significantly different from zero - How can we reconcile these statements? - His picks are high-beta stocks - expected to outperform the market during a bull year, such as 2007 - The remaining 37% of picks (underperformers) had particularly negative returns OVERALL EVIDENCE - U.S. markets are generally efficient, more so for larger and more liquid stocks - Profit-making opportunities arise, but they typically do not last for a long time, as investors execute these trades - Still, there are some persistent deviations from market efficiency: - January effect - Holiday effect - Post-earnings announcement drift - Stocks at their 52-week highs MARKET ANOM
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