Finc 425 Exam 2 Terms with Complete
Solutions
Small Firm Effect (semi strong) - ANSWER-Small stocks out preform large stocks
Book to Market Effect (semi strong) - ANSWER-ratio of firm's book value to its market
value. High B/M stocks out preform low B/M stocks
Post Earning Announcement Drift (PEAD) (semi strong) - ANSWER-Firms w/ positive
earnings surprises earn positive abnormal returns. (Under reaction)
Weak Form Market - ANSWER-Suggests past trading data is already reflected in prices
Semi-strong form Market - ANSWER-which claims publicly available information is
reflected
strong form market - ANSWER-Argues all information, including insider information, is
reflected.
Short-term momentum (Weak form anomalies) - ANSWER-Portfolio of best performing
stocks outperforms portfolio of past 'losers' over 6 months
Long term reversals (Weak form anomalies) - ANSWER-ranking on past five year
performance, 'losers' out perform 'winners' over next 3 years. (Mean Reversion)
CAPM - ANSWER-Single factor model (Beta measures firm's sensitivity to a single
systematic risk factor)
Multifactor Model - ANSWER-stocks have different sensitivities to different macro risk
factors
Fama - French Model - ANSWER-3 factor model. (CAPM + HML(high minus low) +
SMB (Small minus big)
Carhart Model - ANSWER-4 factor model. (CAPM + FF model + WML (Winners-
Losers))
WML - ANSWER-Related to momentum (Weak form)
HML - ANSWER-Related to short firm stocks (Semi-strong)
Solutions
Small Firm Effect (semi strong) - ANSWER-Small stocks out preform large stocks
Book to Market Effect (semi strong) - ANSWER-ratio of firm's book value to its market
value. High B/M stocks out preform low B/M stocks
Post Earning Announcement Drift (PEAD) (semi strong) - ANSWER-Firms w/ positive
earnings surprises earn positive abnormal returns. (Under reaction)
Weak Form Market - ANSWER-Suggests past trading data is already reflected in prices
Semi-strong form Market - ANSWER-which claims publicly available information is
reflected
strong form market - ANSWER-Argues all information, including insider information, is
reflected.
Short-term momentum (Weak form anomalies) - ANSWER-Portfolio of best performing
stocks outperforms portfolio of past 'losers' over 6 months
Long term reversals (Weak form anomalies) - ANSWER-ranking on past five year
performance, 'losers' out perform 'winners' over next 3 years. (Mean Reversion)
CAPM - ANSWER-Single factor model (Beta measures firm's sensitivity to a single
systematic risk factor)
Multifactor Model - ANSWER-stocks have different sensitivities to different macro risk
factors
Fama - French Model - ANSWER-3 factor model. (CAPM + HML(high minus low) +
SMB (Small minus big)
Carhart Model - ANSWER-4 factor model. (CAPM + FF model + WML (Winners-
Losers))
WML - ANSWER-Related to momentum (Weak form)
HML - ANSWER-Related to short firm stocks (Semi-strong)
