part ii : portfolio theory -...

BUS403_Investments_Prof. Chung 0

Part II : PORTFOLIO THEORY

o Risk and Return

o Efficient Diversification

o CAPM and APT

o Efficient Markets

o Behavioral Finance and Technical Analysis


Efficient Markets


• Random Walk : Stock price changes are random and unpredictable.

– Actually submartingale

• Expected return is positive over time

• Positive trend and random around the trend

Random Walk and the EMH

Security Prices

Time


• The hypothesis that stock prices fully reflect all available information about them.

– fully => instantaneously, costlessly, fairly, accurately

– Once information becomes available, market participants analyze it.

– Competition assures that prices reflect information.

EMH and Competition


Figure 8-1 Cumulative Abnormal Returns Surrounding Takeover Attempts


Figure 8.2 Stock Price Reaction to CNBC Reports


• Weak-form EMH : stock prices already reflect all information contained in the history of past trading. (past prices, trading volume, etc.)

• Semistrong-form : stock prices reflect all publicly available information. (fundamental data on firm’s product line, quality of management, earning forecasts, etc.)

• Strong-form : stock prices reflect all relevant information, even inside information.

Versions of the EMH


정보의 범위 시장의 효율성

과거정보

내부정보

공개정보

약형

준강형

강형


• Technical Analysis - using prices and volume information to search for recurring and predictable patterns in future stock prices. – Useful in Weak form inefficient market

– The key to successful technical analysis is a sluggish response of stock prices to fundamental supply-and-demand factors.

– Chartists

Implications of the EMH


• Fundamental Analysis - using economic and accounting information to predict stock prices. – Useful in Semistrong form inefficient market

– Earnings, dividends, quality of management, firm’s standing in the industry, prospects for the industry as a whole

– Discovery of a good firm does not help an investor if the rest of the market also knows those firms are good. The trick is not to identify a good firm, but to find firms that are better than everyone else’s estimate.

Implications of the EMH (cont’d)


• Active Management

– Security analysis

– Timing

• Passive Management

– Index Funds

– Buy and Hold

• A hybrid strategy

– Maintains a passive core and augments its position with one or more actively managed portfolios

Active or Passive Management


• Could speculators find trends in stock returns that would enable them to make abnormal profits?

• Returns over short horizons

– Positive Serial correlation: positive returns followed by positive returns (Momentum effect)

• Returns over long horizons

– Pronounced negative correlation (Reversal effect)

– ‘fad hypothesis’ : positive short-horizon serial correlation caused by overshooting and negative long-horizon serial correlation by correction.

– Contrarian investment strategy

Weak-Form Test: Ret. predictability


• To see whether publicly available information beyond the trading history of a security can be used to improve investment performance

• PER effect

– Consistent abnormal returns on low PER firms

• Small Firm Effect (SF in January Effect)

– Consistent higher average annual returns on small firms; Occurs virtually entirely in January

– Neglected Firm effect (less info higher risk higher returns); liquidity effect(less liquid require

higher risk premium)

Semistrong-Form Tests: Anomalies


Returns in Excess of Risk-Free Rate and in Excess of the SML for size-based portfolios


• Book to Market Ratios – Consistent abnormal returns on high B/M

ratio firms

Semistrong-Form Tests (cont’d)


• Post-Earnings Announcement Drift

– Large abnormal return on the earnings announcement day (+ for + surprise firms, - for – surprise firms)

– Appears to adjust to the earnings information only gradually even after the earnings announcement

Semistrong-Form Tests (cont’d)


Cumulative ARs in Response to Earnings Announcements


Explanations of Anomalies


Information Processing

• Forecasting Errors – Too much weights given to recent experience

(memory bias)

• Overconfidence – People tend to overestimate their ability.

• Conservatism – Too slow in updating their beliefs in response

to new information; price will fully reflect new information only gradually

• Sample Size Neglect & Representativeness


Behavioral Biases

• Framing – Decisions seem to be affected by how choices are

framed.

• Mental Accounting – A specific form of framing in which people

segregate certain decisions

• Regret Avoidance – Investors have more regret when that decision

was more unconventional.

• Prospect Theory – Utility depends not on the level of wealth, but on

changes in wealth from current levels – ‘loss aversion’ in stead of ‘risk aversion’


Cumulative ARs in Response to Earnings Announcements


Behavioral Biases

• Mental Accounting

어렵고 힘들어도 애들 계란은 안 깬다 [중앙일보] 2009년4월23일 - 올 주식형 460억 빠져나갔지만 어린이 펀드엔 976억원 들어와


Figure 9.1 Prospect Theory


ㅇ 기술적 분석: 매매시점 판단 (market timing)

ㅇ 다우이론(Dow theory)

- 가설: 증권시장의 움직임에는 일정한 흐름이 있다

- 주식시장 움직임을 단기변동(일일변동, Daily fluctuation), 중기추세(secondary trend, 수주~수개월), 장기추세(major trend, 1년 이상)로 구분

Technical Analysis


ㅇ 지지선(support line) vs. 저항선(resistance line)

시간

주가

지지선

저항선

Technical Analysis


ㅇ 도표에 의한 분석

- 선도표(Line Chart)

- 봉도표(Bar Chart)

- 양초도표(Candle Chart)

- 점수도표(P&F Chart, Point and Figure)

< 양초도표 > < 봉도표 >

시가

종가 시가

종가

저가

고가

Technical Analysis


ㅇ 이동평균선 분석

- 이동평균(Moving average): 일일변동을 제거하고 장기적/안정적 가격추세를 얻고자 할 때

- 내재가치로 회귀하려는 주가의 속성을 이용

- 5일, 10일(초단기); 20일(단기); 60일(중기); 120일(장기)

Technical Analysis

<Golden Cross> <Dead Cross> <대세상승> <대세하락>

단기 중기

장기

part ii : portfolio theory -...

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