Anomaly

A persistent pattern in returns that an efficient market should have removed. Before treating it as mispricing, rule out data mining, trading costs and a risk the model has missed.

Where you will meet it

Anomaly appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain herding and how it links to market anomalies
  CFA Level I · Portfolio Management

  “Anomalies such as momentum and post-earnings drift are consistent with herding and underreaction, though a persistent anomaly is always open to the competing explanation that it is compensation for a risk not yet identified.”

• Discuss relative value hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
  CFA Level II · Alternative Investments

  “Fixed-income arbitrage exploits anomalies such as yield curve kinks, on-the-run versus off-the-run bonds, swap spreads or carry trades; leverage can be very high and positions suffer when liquidity dries up.”

See also

Data mining

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with A · Glossary