EFFICIENCY OF CAPITAL MARKETS Essay Example | Topics and Well Written Essays - 500 words

EFFICIENCY OF CAPITAL MARKETS - Essay Example Funds that have bet against the market and performed poorly have been closed or folded into other funds, because their performance is not strong enough to attract new buyers. When one counts fund performance over two different periods of time, if one does not allow for survivorship bias, the data can be biased in favors of those funds that have done well, and can make the overall market’s fund performance seem better than it is. 3) What is the relationship between risk and return? How do we normally calibrate returns for risk? In a classic model, the higher the risk, the greater the return should be. Risk is the potential for loss weighed against return, the actuality of gain. With survivorship bias and fund piloting (where a group of funds begin at the same time with the notion that only the successful will ultimately survive), risk tends to be hidden by the mutual fund industry, making it seem like returns are higher than they are, and safer. 4) What is alpha and what does it measure? Alpha is a risk-adjusted statistical measure that weighs the return that is afforded in excess of the risk borne. It can usually be determined by subtracting funding performing from a relevant benchmark index. If one bets on the fund manager, one expects the fund to outperformance the basket of stocks bought in an index. 5) What is a t test and what does it measure? The t-test is a statistical measure used to weigh the significance of two different sample means, through a comparison of the variance between the means. In the case of the Malkiel study (p. 554) it indicates that there is a fairly strong difference between the mean performance rating of surviving funds and non-surviving funds, supporting the notion that survivorship bias must be account for to get a true picture of mutual fund records over time. 6) What conclusions can you reach about "the hot hand" investor? Who are the notable exceptions to this observation? The idea of a â€Å"hot hand† manager