FI 414 Study Guide - Midterm Guide: Greenlight Capital, Form 10-Q, Herding
Document Summary
Inefficient stock market: equal-weight portfolio: efficient: value-weighted. Standard deviation: a measure of dispersion of a random variable around its mean. Is it a good way to measure financial markets: no, normal distribution states that it would be almost impossible to have a stock market crash and we know that, that isn"t true. Implications for finance: financial markets are turbulent, they are very, very risky. Semi-strong: publically available information like news and earnings announcements. Strong: public and private information, cfo trades: advice: buy and hold (passive investing), diversify your portfolio (s&p500 index, diversification limits: diversify across asset classes. Hold cash in bank accounts and money market funds. These solve your liquidity demands: effective diversification: hold 6 to 8 stocks in different industries. Warren buffett said to have benefited from this. Small probabilities are overweighed: risk seeking: lottery ticket, small chance of a large gain, risk-adverse activities: buying insurance, small chance of large loss.
