Market Efficiency and Behavioral Finance

A collection of vocabulary flashcards derived from key concepts in the lecture on market efficiency and behavioral finance.

Random Walk Hypothesis

The theory that stock price movements are largely unpredictable and do not follow predictable patterns.

Efficient Market

A market that rapidly and fully incorporates new information.

Efficient Markets Hypothesis (EMH)

A theory stating that stock prices rapidly incorporate new information, implying that abnormal returns cannot be consistently earned.

Expected Return (CAPM)

The return expected on an asset based on its risk level, as defined by the Capital Asset Pricing Model.

Market Anomalies

Patterns observed in the market that seem inconsistent with the Efficient Markets Hypothesis.

Arbitrage

A type of transaction where an investor simultaneously buys and sells the same asset at different prices to earn a risk-free profit.

Behavioral Finance

An area of finance that examines how psychological factors influence financial behavior and decision-making.

Overconfidence Bias

Tendency of investors to overestimate their ability to predict market outcomes, leading to underestimating risks.

Loss Aversion

The tendency for investors to prefer avoiding losses over acquiring equivalent gains, leading to risk-averse behavior when facing gains.

Representativeness Bias

Cognitive bias where investors overreact or underreact to new information based on past performance.

Moving Average

A mathematical procedure that calculates the average value of a series of stock prices over time to help identify trends.

Technical Analysis

The practice of analyzing historical stock prices and returns to identify patterns that can predict future performance.

Market Volume

The amount of investor interest in stocks, often used as an indicator of market sentiment.

Advance-Decline Line

A market measure that plots the difference between the number of stocks closing higher and lower to assess market strength.