Question

(b) Discuss the implications of market efficiency on technical analysis and portfolio management ( PLS explain not textual ) dont write less than 400 words

Answer 1

Technical analysis is a method which involves movements of share price which are based on study of price graphs or charts on the assumption that share price trends are repetitive.

Technical analysis is based on following assumptions:

1.The market value of stock depends on the supply and demand for stock.

2.The supply and demand is actually governed by several factors.

3.stock prices generally moves in trend which continue for a substantial period of time.

4.Technical analysis relies upon chart analysis which shows past trends in stock prices.

Technical analyst uses three types of charts for analyzing data for technical analysis i.e.Bar chart,Line Chart and point and figure chart.it also has various theories such as the Dow theory,Elliot wave Theory and random walk theory.there are various market indicators on which it is based that are breadth index,volume of transactions,confidence index,Relative sttrength index and odd lot theory.

Technical analysis is based on 3 principles that are:

a.The market discounts everything:There are many experts who criticize technical analysis because it only considers price movements and ignores fundamental factors.the argument against such is based on efficient market hypothesis which states that a companys share price already reflects everything that has effect or could effect a company.

b. Price moves in trends:Technical analysts believe that prices move in trends or we can say that stock price is more likely to continue a past trend than moving in different direction.

c.History tendsto repeat itself:Technical analysis uses charts patterns to analyzesubsequent market movements to understand trends.

Basically,in simple words we can say that technicala analysis predicts the future prices and their direction using purely historical market data and information such as their price movements,volume,open interest etc.which is based on a rule that price captures everthing that can be used for short term investing.Tools of technical analysis help in identifying these trends early and help in investment decision making.It helps in detecting the shift in demand and supply rather early and hence provides clues to future price movements.Price movements in this tends to continue more or less in same direction till the information is fully assimilated in stock price.Whereas on the other side if we see there are most technicak analysts who are not able to provide a convincing explanation for the tools employed by them.ultimately technical analysis must be self defeating proposition with more and more people emploting it the value of such analysis tends to decline.therefore,Technical analysis may not work well in a rational,well orderedand efficient market.If we use technical analysis in relation to fundamental analysis it might be useful in providing proper guidance to investment decision makers.