Question

Question 1

(a) January effect is a well-known anomaly. As an investor, do you think January effect
still exists? Explain your reasoning.

(b) Discuss the implications of market efficiency on technical analysis and portfolio
management.

(c) In 2018, Libra Sdn Bhd issued a RM100 par value preferred stock which pays a 7
percent annual dividend. The company requires a 5 percent rate of return. What price
would you be willing to pay for a share of the preferred stock if you receive your first
dividend one year from now? If the current market is selling this preferred stock at
RM12.50, will you buy? Explain your decision.

(Total: 20 marks)

Answer 1

(a) I do not think that January effect still exists because it can be seen that their prices are not increasing most in the month of January in past few years and this is just been a theoretical anomaly.

It can be seen in respect to 2018 when there was a what is crash in January month where as it can be significantly associated with 2019 and 2020 where there has not been most increase in the prices of index in the month of January so I do not think that January effect still exist.

B. market efficiency on technical analysis and portfolio management is related to confinement of management of portfolio to the passive funds and lack of Technical Analysis because market efficiency advocates that all the publicly available information and the privately available information have already been discounted into the stock price and there is no scope of beating the rate of the return of the market, so it is better to do the passive investment and not engage into any kind of Technical Analysis or fundamental analysis in order to beat the market rate of return because that can never be possible in an Efficient market.

c. Intrinsic value of the preference share= (100*7%)/.05= $140

I will be looking to buy the preferential because it is trading at lower Valuation in the market and it is providing with the value as it is undervalued.