Unit 4: Market efficiency, performance evaluation and options
How prices react to news, how to judge a fund manager, and how options and option strategies pay off. Change any number on the left of a tool and every result, chart and explanation updates at once. Each tool starts from a worked example in the lecture notes, so you can check it against your notes and the video, then try your own numbers.
Chapter 25. The efficient market hypothesis, its tests, anomalies and behavioral biases
If prices reflect all public information, a stock should jump the moment news becomes public and then stop moving. An event study checks this by tracking the part of a stock's return that the market's movement does not explain.
Event study
A firm announces news on day 0 (for example a dividend increase). Each day's abnormal return is the stock's return minus what the market's move alone would have produced. Adding the abnormal returns up day by day gives the cumulative abnormal return (CAR). Its shape tells you whether the market absorbed the news at once, early, or slowly.
Starts from Figure 25.1 and the dividend-announcement example (video 25-2).
Matching biases
Behavioral finance names the systematic mistakes investors make. Match each behavior to the bias that describes it; each answer is checked as soon as you choose.
Starts from Worked example 25.2 (video 25-4).
Chapter 26. Evaluating fund performance and choosing benchmarks
A fund that grew the most did not necessarily have the most skilled manager: it may simply have taken more risk. These tools separate the manager's return from the investor's timing, and adjust returns for risk in five different ways.
Time-weighted versus dollar-weighted return
The time-weighted return links each year's return by compounding, whatever amount was invested that year, so it measures how the investment itself did. The dollar-weighted return is the internal rate of return (IRR) of the money you actually put in and took out, so it also reflects when you bought and sold.
Starts from Worked example 26.1 (video 26-1).
Performance scoreboard
Compare portfolios with the market index using five risk-adjusted measures. Some adjust for total risk (standard deviation), some only for market risk (beta), and some look at the extra return per unit of risk that could have been diversified away. The measures can disagree.
Starts from Worked example 26.2 (video 26-1).
Chapter 27. Option contracts and option payoffs
A call gives the right to buy a stock at the strike price; a put gives the right to sell it. At expiration an option is worth exactly its payoff, and the profit is that payoff net of the premium.
Option payoff and profit
Pick a call or a put, and whether you buy it (pay the premium, get the right) or write it (receive the premium, take on the obligation). The chart shows what the position is worth and what it earns for every stock price at expiration.
Starts from Worked example 27.1 (video 27-2).
Hedging a purchase with a call
A firm that must buy oil later fears the price will rise. Buying a call fixes the most it can pay, while still letting it buy cheaply if the price falls. The premium is the cost of this insurance.
Starts from Worked example 27.2 (group Theme 4).
Chapter 28. Option strategies: protective puts, covered calls, straddles and spreads
Combining the stock with calls and puts reshapes the payoff almost at will: a floor, a cap, a bet on a big move, or a cheap bet on a rise. The method is always the same: add up the payoffs of the pieces, then subtract what the position cost to set up.
Strategy builder
Choose a strategy and enter the prices of its pieces. The chart compares the strategy's profit at expiration with simply holding the stock. Choosing a strategy loads example numbers for it, which you can then change.
Starts from Worked examples 28.1 and 28.2 (video 28-1).