AFM492 Midterm: FSA Study Notes - Midterm.pdf

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM492
• Professor: Jiahua Chen

Document Summary

Efficient markets hypothesis: security prices reflect all available info. , as if such information could be costlessly digested and translated immediately into demand for buys or sells without regard to frictions imposed by transaction costs. Aka: information is reflected in security prices and immediately upon its release. Stock prices adjust quickly to new information. Stock prices do not react to non-information. Some investors are irrational, but biases can go both directions and cancels each other out. Some systematic irrationality, but eliminated by rational arbitrageurs. Excess volatility in returns -> returns are too volatile to be explained by a discounted. Returns predictability cross-sectional returns exhibit predictable patterns. Investors may have systematic cognitive bias such as conservatism or representative heuristics. Arbitrage is almost always costly & risky. Arbitrage requires sufficient mispricing to function properly arbitrage & mispricing must co-exist. + div2 (1+re)2 + div3 equity value= div1.