The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM.

The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.

Has the feature that securities are held in proportion to its total market value.

Implies that riskless excess profits are not possible in efficient capital markets.

Something that can be eliminated by diversification.

The tendency for investments in firms with low market values relative to book values to generate positive abnormal returns.

A set of portfolios that maximizes expected return at each level of portfolio risk.

Graphical representation of the CAPM.

Investing technique based on price trends and trading patterns.

Insofar as markets are efficient, security prices will adjust to a level that offers investors an expected return commensurate with the security’s systematic risk.

Insofar as markets are efficient, security prices will adjust to a level that offers investors higher expected return for higher diversifiable risk.

Momentum portfolios generate negative alphas by buying “winners” (stocks with returns high over the past month) and shorting “losers” (stocks with low returns over the past month).

Momentum portfolios generate negative alphas by buying “losers” (stocks with low returns over the past month) and shorting “winners” (stocks with high returns over the past month).

The CAPM implies that stocks with higher systematic risk should have higher expected returns.

The CAPM implies that stocks with higher diversifiable risk should have higher expected returns.

Modern portfolio theory implies that stocks with higher systematic risk should generally have higher returns.

Modern portfolio theory implies that stocks with higher firm-specific risk (i.e., diversifiable risk) should generally have higher returns.

According to the value-investing philosophy, buying stocks with a low P/E ratio should generate higher returns than a high P/E ratio.

According to the value-investing philosophy, buying stocks with a high P/E ratio should generate higher returns than a low P/E ratio.

The expected rate of return of a portfolio is the weighted average of the expected returns of the component assets, with weights equal to the proportional amount invested in each asset.

The standard deviation of a portfolio's returns equals the weighted average of the standard deviations of the component assets, with weights equal to the proportional amount invested in each asset.

If the CAPM fully captures risk, then firm's with higher betas should generally earn higher returns.

If the CAPM fully captures risk, then firm's with higher betas should generally earn lower returns.

Because of diversification, the standard deviation of a portfolio is less than the weighted average of the expected returns on the component securities, with the portfolio proportions as weights.

Because of diversification, the expected rate of return on a portfolio is greater than the weighted average of the expected returns on the component securities, with the portfolio proportions as weights.

If the efficient markets hypothesis is true, especially in one of its stronger forms, then actively managed portfolios will generally earn lower returns (net of fees) than passive investment strategies.

If the efficient markets hypothesis is true, especially in one of its stronger forms, then actively managed portfolios will generally earn higher returns (net of fees) than passive investment strategies.

In a two-factor economy, the expected return on a security would be the sum of three terms: (i) the risk-free rate of return; (ii) the security's market beta times the risk premium on first factor; (iii) the security's market beta times the risk premium on second factor.

In a two-factor economy, the expected return on a security would be the sum of two terms: (i) the risk-free rate of return; (ii) the security's market beta times the risk premium on the market portfolio.

Consider two securities A and B with equal standard deviation. If A has lower correlation than B to portfolio C, then adding security A to portfolio C would generate a greater diversification benefit than adding security B to portfolio C.

Consider two securities A and B with equal standard deviation. If A has higher correlation than B to portfolio C, then adding security A to portfolio C would generate a greater diversification benefit than adding security B to portfolio C.

Research in support of the post-earnings announcement drift challenges the efficient markets hypothesis.

Research in support of the post-earnings announcement drift supports the efficient markets hypothesis.