Chapter 13
Investor Behavior and Capital Market Efficiency
I. Chapter Outline
The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides
are referenced in bold. Alternative Examples to selected textbook examples are also available in the
PowerPoint Lecture Slides and are also referenced in bold.
13.1 Competition and Capital Markets (Slides 8–12)
• Identifying a Stock’s Alpha (Slides 8–9)
13.2 Information and Rational Expectations (Slides 13–19)
• Informed Versus Uniformed Investors (Slide 13)
• Example 13.1 How to Avoid Being Outsmarted in Financial Markets (Slides 14–15)
• Rational Expectations (Slides 16-17)
13.3 The Behavior of Individual Investors (Slides 20–25)
• Underdiversification and Portfolio Biases (Slide 20)
13.4 Systematic Trading Biases (Slides 26–30)
• Hanging on to Losers and the Disposition Effect (Slide 26)
• Investor Attention, Mood, and Experience (Slides 27–28)
• Herd Behavior (Slide 29)
• Implications of Behavioral Biases (Slide 30)
13.5 The Efficiency of the Market Portfolio (Slides 31–38)
• Trading on News or Recommendations (Slides 31, 33)
– Takeover Offers (Slide 31)
• Figure 13.5 Returns to Holding Target Stocks Subsequent to Takeover Announcements
(Slide 32)
– Stock Recommendations (Slide 33)
56 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition
• Figure 13.7 Manager Value Added and Investor Returns for U.S. Mutual Funds (1977–
2011) (Slide 36)
13.6 Style-Based Techniques and the Market Efficiency Debate (Slides 39–52)
• Size Effects (Slides 39, 42)
– Excess Return and Market Capitalizations
• Figure 13.9 Excess Return of Size Portfolios, 1926–2015 (Slide 40)
– Excess Return and Book-to-Market Ratio
– Size Effects and Empirical Evidence
• Figure 13.10 Excess Return of Book-to-Market Portfolios, 1926–2015 (Slide 41)
• Interview with Jonathan Clements
• Example 13.2 Risk and the Market Value of Equity (Slides 43–44)
13.7 Multifactor Models of Risk (Slides 53–72)
• Using Factor Portfolios (Slides 54–57)
• Selecting the Portfolios (Slides 58–61)
– Market Capitalization Strategy (Slide 58)
– Book-to-Market Ratio Strategy (Slide 59)
– Past Returns Strategy (Slide 60)
– Fama-French-Carhart Factor Specification (Slide 61)
• The Cost of Capital with Fama-French-Carhart Factor Specification (Slides 71-72)
13.8 Methods Used in Practice (Slides 73, 75)
• Financial Managers (Slide 73)
• Figure 13.11 How Firms Calculate the Cost of Capital (Slide 74)
• Investors (Slide 75)
II. Learning Objectives
13-1 Compute a stock’s alpha using equation 13.2.
13-2 Explain how investors’ attempts to “beat the market” should keep the market portfolio
efficient.
©2017 Pearson Education, Ltd.
13.7 Multifactor Models of Risk
The first part of this section points out that it is not actually necessary to identify the efficient
portfolio itself. All that is required is to identify a collection of portfolios from which the efficient
13.8 Methods Used in Practice
Figure 13.11 summarizes Graham and Harvey’s results about how firms actually calculate cost of
capital. The chapter concludes with the point that, “All the techniques we covered are imprecise.”
That is, there is no clear answer to the question of which technique is used to measure risk in
Chapter 13 Appendix Building a Multifactor Model
This appendix derives of a two-factor model of expected returns.
IV. Spreadsheet Solutions in Excel
The following Problems for Chapter 13 have spreadsheet versions of the problems available: 2, 19,
20, 21, 27, 28, and 29.