Question

1. Given the following situations, evaluate in each scenario whether the hypothesis of an efficient capital market of semi-strong form is violated.

1. Through the introduction of an advanced webinar into the analysis of the past share price movements, a brokerage firm is able to predict price movements are able to earn consistent 1% profit more than normal market returns after adjusted for risk. 4m (250 words)
2. On average, investors in the stock market this year are expected to earn a positive return on their investment. Some investors will earn considerably more than others. 4m (250 words)
3. You have discovered that the square root of any given stock price multiplied by the day of the month provides an indication of the direction in price movement of that particular stock with a probability of 20%. 4m (250 words)

Answer 1

A. This case is not a semi strong Efficient market because it can be seen that introduction of an advanced webinar into the analysis of past their movement has led to consistent rate of return which is more than the normal market return and these are not possible in semi Efficient market because Efficient market of semi-strong form will be advocating that all the publicly available information have already been discounted into the stock price but privately held information is not discounted into the stock price and there is scope of making excess market rate of return through having access to private insider information which is not in this case, because past performance of chart is external public information and semi-strong efficient form will not be advocating for excess rate of return through Public Information and this is not a semi efficient market.

B. This can be an example of semi efficient market because some investor who are earning higher rate of return than other maybe the insiders of the company and the insiders have access to the private sensitive information of the company and these investors are known to the insider information and they have a scope of making higher rate of return than the others in the market so these investors will be earning higher rate of return than the others, so it can be said that this can be and Semu Efficient market in which the investor is having access to the private information and he is making a high rate of return so this can be an example of an efficient form of market.

C. This is a violation of semi efficient form of market because semi efficient market will not be providing any indication of the direction in the movement of the stock with any probability because even if there is a high probability of movement in the stock and these probabilities will be indicating that people can make higher rate of return through having access to the publicly available information and they are completely violating the principle of semi-strong Form of Market as they are having access to the publicly available information and they can guess the stock price by finding a trend in the market and this technical analysis are not viable in semi present market, so it can be said that this is a violation of semi efficient form of market.