Answer: Value effect

## Explanation **Correct Answer: A (Value effect)** **Understanding Cross-Sectional vs. Time-Series Anomalies:** 1. **Cross-Sectional Anomalies**: These involve differences in returns across different securities or portfolios at the same point in time. They compare how different types of stocks perform relative to each other. 2. **Time-Series Anomalies**: These involve patterns in returns over time for the same security or market. **Analysis of Each Option:** - **A. Value effect**: This is a classic cross-sectional anomaly where value stocks (with low price-to-book ratios, low price-to-earnings ratios, etc.) tend to outperform growth stocks over time. It compares different types of stocks (value vs. growth) at the same point in time. - **B. Overreaction effect**: This is a time-series anomaly where securities that have performed poorly in the recent past tend to outperform in the future, and vice versa. It examines patterns over time for individual securities. - **C. Closed-end fund discount**: This is also a time-series anomaly where closed-end funds trade at discounts or premiums to their net asset value over time. It involves the relationship between price and NAV evolving over time. **Why Value Effect is Cross-Sectional:** The value effect compares the performance of different categories of stocks (value vs. growth) simultaneously. Researchers form portfolios based on valuation metrics and observe that value stocks systematically outperform growth stocks across different time periods, making it a cross-sectional comparison. **Additional Context:** - Other cross-sectional anomalies include: size effect (small-cap vs. large-cap), momentum effect (though momentum can be viewed both ways) - Other time-series anomalies include: January effect, weekend effect, holiday effect **For CFA Level 1 Candidates:** Understanding the distinction between cross-sectional and time-series anomalies is important for the Equity Investments section, particularly in the study of market efficiency and behavioral finance.

Author: LeetQuiz .