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INVESTMENT ANALYSIS Northampton University TABLE OF CONTENTS INTRODUCTION – AN OVERVIEW OF EFFICIENT MARKET HYPOTHESIS Market Efficient Theory is not a new concept in modern finance; the findings following Degutis (2014) was initially originated from the 19th century. Over the years, the theory draws attentions of many researchers with growing percentage of theories around the matter. One of the first economic researchers of the subject is Fama (1970), whose work at the time has successfully proved the dominance of EMH. With modern financial analysis, the efficient stock market is considered as ‘a market where stock prices can incorporate fundamental information about the companies’ (Degutis, 2014). Following the definition, the market value of the firm will fluctuate by the ‘intrinsic value` of the business. On the other hand, Goedhart and Koller (2010) said that due to the different in the transactions costs and the awareness of investors; these underlying information sometimes unable to cohered with the share prices which creates a gap between the intrinsic value of the firm and the market prices. Furthermore, there are many other studies which offer different perspectives on the matter also such as Eakins and Mishkin (2012), stated that asset prices will be coherence with available information in an efficient market which was supported by Brealey and Myers (2011). From the studies around EMH, there are two major findings; the first one is that in an efficient market; the market absorb the information fully and the second implication is about the low change of identifying anomalies. Following Degutis (2014), there is three type of EMH depending on the ability to reflect the performance of the market prices from the information including weak form; semi-strong form and strong efficiency form of efficient market. Roberts (1967) first suggesting the separation of market efficiency into strong and weak forms. Firstly, a weak form of the efficient market reflects all ‘past information’ into the prices` performance as the result; ‘there`s no technical analysis can forecast prospect since past profit pattern are not correlated, and therefore it cannot use for interpreting the future` (Harder, 2008). Secondly, a Semi-strong form of efficient market able to reflect publicly available information such as dividends, fusions, etc. Lastly, the strong form of the efficient market reflects both public and private information into share prices performance. EFFECTIVENESS OF EFFICIENT MARKET HYPOTHESIS STRONG FORM OF EFFICIENT MARKET The strong form of the efficient market was tested in many papers including the study of Ajlouni (2004) as the database was based on the data of FTSE100 from May 1999 to July 2000. The ‘study event method` was applied to the calculation of expected returns from cumulative abnormal returns and simple Market Model parameters in the Capital Asset Pricing Model (CAPM). As the result, the study has determined that London Stock Exchange (LSE) is significantly inefficient in term of the strong level of market efficiency. SEMI-STRONG FORM OF EFFICIENT MARKET Following Spyrou et. al. (2007) on the semi-strong test in LSE, large capitalization indices react much stronger to positive/negative shocks. The data was captured from 1998 to 2004 calculating the differences between today and the day before closing price. WEAK FORM OF EFFICIENT MARKET Weak-form of an efficient market is tested for the FTSE 30 share index. The result pointed out that the weak form of the efficient markets hypothesis is not valid for the FTSE 30 share index (Al-Loughani and Chappel, 1997). However, following Milionis and Moscho (2000); the finding was different as ‘validity of the weak-form efficient markets hypothesis is applied to (LSE) London Stock Exchange.` Various tools as well as correlation tests between past information and stock returns were performed in relation to the popularity of the EMH theory about the dependence of returns including Brealey and Myers (2011); which suggested that previous day’s stock returns do not have impact on the next day stock return performance by considering some of the major firms’ correlation coefficient over 2 days. Though, some may criticize that the length two days isn`t enough for such argument such as Degutis (2014). But in support of such theory, several other tests were also conducted by Brealey and Myers (2006) on a weekly basis with similar outcomes. Also, the two tests by Jensen (1978) and Shleifer (2000) also supporting the idea of the independency of the stock returns to past data Also, the speed of reflection of information into prices also support the validation of EMH following Schleifer (2000) research which insisted that the semi-strong form of EMH was by the price correction mechanisms. Furthermore, due to the time of the announcement of information as considered to be happened after the stock price movement following with the concerns of the information misleading as well as the price adjustments. It is argued to be a response to new information flow at the time of announcement following the fluctuation of the price (Schleifer, 2000). On the other hand, despite the numbers of studies, literature that promotes the validity of the EMH theory, there are also quite a few number of researches said otherwise; denying the use and application of the theory in particular following the study of Malkiel (2001), suggested that for small businesses, the returns were roughly 1.4 times higher compare to larger firms. The research contributed to the studies evolving around the considerations of abnormally high returns of small companies than with big companies/corporations. Different studies about the inefficiency of the market based on the analysing of matters such as the P/E and P/BV ratios by Campbell and Shiller (1998) or the ‘January effects’ by Eakins and Mishkin (2012) or (Schwert, 2003) also against the EMH theory. PERFORMANCE OF THE ACTIVE PORTFOLIO PERFORMANCE OF MY PORTFOLIO The portfolio is made up initially from following stocks in the table follows: Table: Selected stocks No. Name of the company 1 Tullow Oil 2 Serco 3 ICAP Plc 4 Fresnillo 5 BP EPIC Code TLW SRP IAP FRES BP. Price 160 p 80.05 p 412.10 p 976 p 345.35 p Date of purchase 23-02-2016 23-02-2016 23-02-2016 23-02-2016 23-02-2016 ... - tailieumienphi.vn
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