CMT L2: Lecture Notes

Flashcards based on the lecture notes provided by the user.

Alpha

Excess returns earned by relative-return investors, either above or below the market index to which their performance is benchmarked.

Beta

A measure of risk that can apply to an individual stock or to a portfolio of stocks. The average market beta = 1.0.

Formula for alpha

Alpha = Rp − (Rf + 𝛽 x (Rm − Rf))

Adaptive Market Hypothesis (AMH)

Suggests that financial markets do not efficiently adjust to information because they are made up of investors whose attitudes and behaviors evolve over time.

Fractal Market Hypothesis (FMH)

Differing decision horizons and risk tolerance among investors can lead to a wide variety of reactions.

Trading in Pakistan

Theories suggest that returns in Pakistan’s main stock market are not random and not weak form efficient and that investors can generate above-market returns using technical analysis.

Asset Market Bubble

A period where an asset price exceeds its fundamental value by a significant amount, far more than the longer-term fundamentals would justify.

Displacement

The catalyst for the bubble; represents the birth of the boom and is often linked to a change in financial conditions or a shift from tight and restrictive monetary or fiscal policy to an environment of easy money.

Boom

The stage when asset prices begin increasing rapidly, and leverage (credit creation) gets added to the system.

Euphoria

A phase of pure speculation where most investors who want to be involved are now fully committed. The financial industry creates products of investment vehicles that add even more capacity to boost prices, and there is too much leverage and debt in the system.

Role of a Fundamental Analyst

Analysts gather and evaluate evidence, removing preexisting bias, and specialization occurs in sectors due to the impracticality of knowing all sector intricacies.

Role of Technical Analyst

Analysts focus on price behavior of a stock, especially the interaction of buyers, sellers, volume, and investor psychology. Sector and asset class are agnostic.

Fusion Analysis

Fusion analysis is a four-legged stool approach to analyzing financial markets, comprising economic, fundamental, quantitative, and technical analysis.

Ralph Acampora's Economic Analysis

A four-legged stool approach where one understands the current economic position in the business cycle.

Ralph Acampora's Fundamental Analysis

A four-legged stool approach based on the reports and ratings of analysts who follow industries or companies that do well within that specific economic cycle.

Ralph Acampora's Quantitative Analysis

A four-legged stool approach based on an analysis of fundamental and technical factors that get backtested across industries and global markets.

Ralph Acampora's Technical Analysis

A four-legged stool approach that confirms a trend is favorable and matches the economic, fundamental, and quantitative findings.

Entity, two components

The entity and its stock can move in opposite directions based on earnings results.

Technical Analysis of Trends

Historical data about the trend does not change or can be manipulated easily, which makes it an unemotional way to analyze investments.

Identifying investable themes

Technicians have skills and can identify potential similarities of one sector, industry group, or group of related securities; identification may give potential strength or weakness insights of other sectors or groups.

Spinning Top Pattern

A candlestick pattern that reflects indecision in the market, and can appear in both uptrends and downtrends.

Shooting Star Pattern

A candlestick patter that represents a market initially dominated by buyers, but quickly overtaken by sellers.

Standard Doji

A candlestick pattern characterized by a small real body, where the opening and closing prices are nearly identical.

Dragonfly Doji

Appears after a downtrend with a long lower shadow and almost no upper, with the opening and closing prices near the high of the session.

Gravestone Doji

Appears after an uptrend with a long upper shadow and little to no lower, with the opening and closing prices near the low of the session.

Long Legged Doji

Candle pattern characterized by long upper and lower shadows, which indicate that prices fluctuated significantly during the session, but neither buyers nor sellers could maintain control by the close.

Engulfing Patters

The second candle fully engulfs the real body of the first candle, representing a strong shift in sentiment.

Harami Pattern

Second Candle is smaller and fits within range of the first, like a baby in the womb

Piercing Line

Second candle opens lower and closes above midpoint of the first candle.

Dark Cloud Cover

Second candle opens higher and closes below midpoint of first candle.

Continuation Patterns for Price Targets

Calculate the distance between where the initial move for the flag or pennant pattern started and the minor reversal level where the pattern started forming.

Average True Range

Adjusting for an instrument’s daily volatility offers an objective method of decision making by taking a multiple of its ATR and waiting for it to pass the pattern’s boundary.