Describe what an anomaly means.
Give three examples of anomalies and explain why they are considered an anomaly.
Give three examples of anomalies and explain why they are considered an anomaly. 1. January Effect : It is observed that stocks that underperform in fourth quarter, saw a rise in price in January. The reason behind this could be the tax deduction benefits of incurring losses.
2. Weekdays : It has been observed that stocks tend to move more on Mondays and Fridays as compared to other three days. The reason could be that Monday is the day when Weekend analysis hits the floor, and Friday is the day when speculators hold on to the stock hey expect to rise on weekends.
3. Fibonacci Levels : There are many observations about the stock prices moving along the Fibonacci levels as a technical indicator. There are no statistical
Week 3 Assignment 1:
Explain how a combination of the conservatism bias and the representativeness bias can explain the presence of a pattern of short- to medium-term momentum along with long-term reversal patterns in the stock market.
Momentum relies heavily on the autocorrelation between returns which assumes that there will be a trend continuation. However, according to Alexander (1961); Cootner (1964); Samuelson (1965) market price movement is random and additionally, market movements are difficult to predict (Lo & MacKinlay). Roberts (1959); Wärneryd (2001) argue that people, despite prices following a random walk, will always convince themselves that there is a pattern that has a predictive value. As such, people have certain psychological mechanisms of dealing with the random nature of prices (Zielonka, 2004). Anchoring, herding, representativeness and misperception of regression to the mean are some discussed by Zielonka. Momentum relies heavily on the autocorrelation between returns which assumes that there will be a trend continuation. However, according to Alexander (1961); Cootner (1964); Samuelson (1965) market price movement is random and additionally, market movements are difficult to predict (Lo & MacKinlay). Roberts (1959); Wärneryd (2001) argue that people, despite prices following a random walk, will always convince themselves that there is a pattern that has a predictive value. As such, people certain psychological mechanisms of dealing with the random nature of prices (Zielonka, 2004). Anchoring, herding, representativeness and misperception of regression to the mean are some discussed by Zielonka. Herd behaviour is the predisposition of people to follow the actions of a much larger group in making individual judgement. Herd behaviour is the predisposition of people to follow the actions of a much larger group in making individual judgement. An investor assumes the probability of the stock going in a certain direction by judging it relatively to its performance in the past . Although Conrad and Kaul (1998) have put forward for consideration a risk-based analysis of momentum Hong . (2000) express that there is not much that supports the risk based theories, even though their risk-based analysis is logical
In the first week, you learned about one possible source of limits to arbitrage -- fundamental risk. What do you think would happen to a closed-end fund's discount if the fund announced that it would liquidate in six months when it will distribute the NAV to its shareholders? How does that announcement affect the fundamental risk of an arbitrageur that tries to exploit the closed-end fund discount?
At liquidation, price will equal NAV. This puts a limit on fundamental risk. Investors need only to carry the position for a few months to profit from the elimination of the discount. Moreover, as the liquidation date approaches, the discount should dissipate. This greatly limits the risk that the discount can move against the investor. At the announcement of impending liquidation, the discount should immediately disappear, or at least shrink considerably.
A trendy investment instrument is what is called an 'equity-indexed-annuity' or EIA. This investment guarantees you a minimum rate of return in the stock market while ensuring you against any losses. EIAs are typically described as offering "the upside without the downside." But in exchange for limiting your losses, EIAs also slap a ceiling over your gains. Explain the behavioral biases at work in this example for why this investment option may be so popular.
A trendy investment instrument is what is called an ‘equity-indexed A trendy investment instrument is what is called an ‘equity-indexed-annuity’ or EIA. This investment guarantees you a minimum rate of return in the stock market while ensuring you against any losses. EIAs are typically described as offering “the upside without the downside.” But in exchange for limiting your losses, EIAs also slap a ceiling over your gains. Explain the behavioral biases at work in this example for why this investment option may be so popular.- General General Questions
Week 3 Assignment 2:
Please upload your completed spreadsheet that includes the moving average values for each stock and the S&P 500 index as well as the relative strength measure for each stock.
https://drive.google.com/file/d/1y-SJ86Pho9oIBMulm1A-cRg261IxuwL8/view?usp=sharing
Please upload your graphs that show the four-month moving averages together with the actual prices for APPL, GE, Boeing, and S&P 500 index. Make sure you produce one plot for each security.
https://drive.google.com/file/d/1rULjWo-LoMJAic1mHHuneitxnfZ2JTqB/view?usp=sharing
Pick one security and upload a graph that plots its relative strength over the sample period.
https://drive.google.com/file/d/1HliwqJHmdAJJwcAj-9Wr5fDPWat5TAoZ/view?usp=sharing
For the security that you have picked, find all the instances in which its relative strength measure increases by more than ten basis points (e.g an increase where the relative strength index from 0.09 to 0.091) and all those instances in which its relative strength drops by more than ten basis points. Is the stock more or less likely to outperform the S&P in the subsequent two months when its relative strength has increased? Is the stock more or less like to underperform when its relative strength measure has decreased? In other words, does relative strength persist?
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.
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