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information
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Figure 8.1 Cumulative Abnormal Returns before Takeover Attempts: Target Companies
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trading
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information
Strong-form EMH Stock prices already reflect all relevant
Support Level
Unlikely for stock/index to fall below
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earnings, dividend prospects, future interest rate expectations and firm risk
Assumes stock price equal to discounted value
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Market
Active management assumes market inefficiency Passive management consistent with semistrong
efficiency
Inefficient market pricing leads to inefficient
resource allocation
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abnormal returns
Book-to-market effect
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19.8 17.0
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12.9 11.0
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0 1 2 3 4 5 6 7 8 9 10
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11.8 12 10 11.0 11.7 11.7
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6 4 2 0
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Small-firm effect
Book-to-market effect
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abnormal performance will attract new funds until additional cost, complexity drives alphas to zero
Chen, Ferson, and Peters: On average, bond
mutual funds outperform passive bond indexes in gross returns, underperform once fees subtracted
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Stock-pricing ability of minority of managers sufficient to cover costs; performance persists over time
Samuelson: Records of most managers show no
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Figure 8.7 Mutual Fund Alphas Computed Using FourFactor Model, 1993-2007
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