Slide 1Chapter OutlineChapter Outline (continued)Learning ObjectivesLearning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)13.1 Competition and Capital Markets13.1 Competition and Capital Markets (continued)Figure 13.1 An Inefficient Market Portfolio13.1 Competition and Capital Markets (continued)Figure 13.2 Deviations from the Security Market Line13.2 Information and Rational ExpectationsTextbook Example 13.1Textbook Example 13.113.2 Information and Rational Expectations (continued)13.2 Information and Rational Expectations (continued)13.2 Information and Rational Expectations (continued)13.3 The Behavior of Individual Investors13.3 The Behavior of Individual Investors (continued)13.3 The Behavior of Individual Investors (continued)Figure 13.3 NYSE Annual Share Turnover, 1970–2011Slide 2313.3 The Behavior of Individual Investors (continued)13.4 Systematic Trading Biases13.4 Systematic Trading Biases (continued)13.4 Systematic Trading Biases (continued)13.4 Systematic Trading Biases (continued)13.4 Systematic Trading Biases (continued)13.4 Systematic Trading Biases (continued)13.5 The Efficiency of the Market PortfolioSlide 3213.5 The Efficiency of the Market Portfolio (continued)Slide 3413.5 The Efficiency of the Market Portfolio (continued)Figure 13.7 Estimated Alphas for U.S. Mutual Funds (1975–2002)Slide 3713.5 The Efficiency of the Market Portfolio (continued)13.6 Style-Based Anomalies and the Market Efficiency DebateFigure 13.9 Excess Return of Size Portfolios, 1926–2011Slide 41Slide 42Alternative Example 13.2AAlternative Example 13.2A (continued)Alternative Example 13.2BAlternative Example 13.2B (continued)Slide 47Slide 48Slide 49Slide 5013.7 Multifactor Models of Risk13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)Table 13.1 FFC Portfolio Average Monthly Returns, 1927–2012Alternative Example 13.3BAlternative Example 13.3B (contined)Alternative Example 13.3B (continued)13.7 Multifactor Models of Risk (continued)13.7 Multifactor Models of Risk (continued)13.8 Methods Used In PracticeFigure 13.11 How Firms Calculate the Cost of CapitalChapter QuizChapter Quiz (continued)Chapter Quiz (continued)Slide 70AppendixAppendix (continued)Appendix (continued)Appendix (continued)Appendix (continued)Chapter 13Investor Behavior and Capital Market EfficiencyCopyright ©2014 Pearson Education, Inc. All rights reserved.Chapter Outline13.1 Competition and Capital Markets13.2 Information and Rational Expectations13.3 The Behavior of Individual Investors13.4 Systematic Trading Biases13.5 The Efficiency of the Market Portfolio13.6 Style-Based Anomalies and the Market Efficiency DebateCopyright ©2014 Pearson Education, Inc. All rights reserved.Chapter Outline (continued)13.7 Multifactor Models of Risk13.8 Methods Used in PracticeAppendixCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives1. Compute a stock’s alpha2. Explain how investors’ attempts to “beat the market” should keep the market portfolio efficient3. Describe the effect of homogeneous expectations on a security’s alpha4. Explain why holding the market portfolio does not depend on the quality of an investor’s information or trading skills5. Understand what the CAPM requires about investors’ expectationsCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)6. Evaluate under what conditions the market portfolio would be inefficient7. Explain diversification bias and familiarity bias8. Discuss why uninformed investors trade too much9. Assess how uninformed investors’ behavior deviates from the CAPM in systematic ways10. Explain the disposition effectCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)11. Review why investors, on average, earn negative alphas when they invest in managed mutual funds12. Assess the strategy of an investor “holding the market”13. Discuss the size effect14. Describe the momentum trading strategy15. Explain how the choice of the market proxy may lead to non-zero alphasCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)16. Discuss how systematic behavioral biases may affect the efficiency of the market portfolio17. Assess how a preference for stocks with a positively skewed return distribution would impact the market portfolio’s efficiency18. Describe the Arbitrage Pricing Theory19. Discuss the expected return on a self-financing portfolio20. Discuss the Fama-French-Carhart modelCopyright ©2014 Pearson Education, Inc. All rights reserved.13.1 Competition and Capital Markets•Identifying a Stock’s Alpha–To improve the performance of their portfolios, investors will compare the expected return of a security with its required return from the security market lineCopyright ©2014 Pearson Education, Inc. All rights reserved.13.1 Competition and Capital Markets (continued)•Identifying a Stock’s Alpha–The difference between a stock’s expected return and its required return according to the security market line is called the stock’s alpha–When the market portfolio is efficient, all stocks are on the security market line and have an alpha of zeroCopyright ©2014 Pearson Education, Inc. All rights reserved.Figure 13.1 An Inefficient Market PortfolioCapital MarketLine (CML)Copyright ©2014 Pearson Education, Inc. All rights reserved.13.1 Competition and Capital Markets (continued)•Profiting from Non-Zero Alpha Stocks–Investors can improve the performance of their portfolios by buying stocks with positive alphas and by selling stocks with negative alphasCopyright ©2014 Pearson Education, Inc. All rights reserved.Figure 13.2 Deviations from the Security Market LineCopyright ©2014 Pearson Education, Inc. All rights reserved.13.2 Information and Rational Expectations•Informed vs. Uninformed Investors–In the CAPM framework, investors should hold the market portfolio combined with risk-free investments–This investment strategy does not depend on the quality of an investor’s information or trading skillCopyright ©2014 Pearson Education, Inc. All rights reserved.Textbook Example 13.1Copyright ©2014 Pearson Education, Inc. All