DFA CASE
1)Higher E[r], lower var and stdev compared to benchmark
2) Though a says DFA outperformed CAPM, low r2 means not a good predictor of DFA returns
3) DFA most likely did not have excess rets compared to the classes of stock which tend to do better than the market as a whole (3 factor)
4) No, not invest my money into. Low sharpe ratio!
5) DFA offers low cost index funds in a variety of asset classes. They sell through fee-only certified financial planners and only to wealthy, infrequent trading investors. This way they can better manage their cash flows. Believe in efficient market
6) Small and Value stocks carry greater risk than large and growth. Higher r= higher E[r]
7) Since 1960s stocks with high book-to-market ratios have outperformed stock with low. Strong relation b/t high BM and avg return on stock and size. Small and Value have positive alphas.
Mid-Term
1) price of zero is always<face value
2) In CAPM, we do NOT talk about idiosyncratic risk
Fixed Income
1)Expect. Theory- shape of yield curve depends solely on markets expectations of future short term interest rates
2) Liquidity: forward rates offer a positive liquidity premium over exp spot rates (is used to compensate investors for risk)
3) Replicating a portfolio matches cash flows exactly; immunizing approximates them
Equities
1) Stock returns are NOT predictable
2) Riskier investments have higher R, on avg.
3) By holding a diverse portfolio, we can reduce risk w/out sacrificing expected return
4) var and stdev are precise; E[R[ is not
5) Efficient portfolios make up Portfolio Front
6) Systematic R affects ALL assets (cant reduce)
7) Portfolio Front has steepest slope
8) Tangent Port has highest Sharpe Ratio and consists of entirely risky assets
9) Separation THM: selecting securities for most efficient portfolio is separate from how to divide up port. b/t risky and riskfree assets
In equilibrium, tangent port= market port
Market Effiecieny
1) if we cannot achieve sign. Abnormal ret
2) price changes are not pred.
3) prices reflect ALL avail. Info
Weak Form- using data in market trading data
Semi Strong- using publically avail info
Strong- cant get abn. Ret using all info
Behavior Finance
1) Traditional and Behavior Finance
2) Traditional: investors are rational and markets are efficient
Behavior: investors are irrational and markets are inefficient
3) Cognitive Biases: people exhibit heruisitc biases and erroneous reaction to new info:
4) Representativenss
-Conjunction Fallacy-(Linda, femy bank teller)
--People tend to believe past returns indicate future returns
5) Availability
--estimating the frequencies of events on the basis of how easy or difficult it is to retrieve from long term memory
6)Overconfidence
--might lead to larger trading volume
7) Preference Based Bias
--people make inconsistent and suboptimal choices, incompatible with subjective exp. Utility
--Loss Aversion and Ambiguity Aversion
--Gamble for Resurrection