An investor is evaluating the use of the bottom-up approach and the top- down approach to fundamental analysis. The investor wants to use the approach that will best enable them to structure a diversified share portfolio that will achieve specified income returns and capital gains. Which approach do you recommend the investor adopt? We can use bottom-up approach to make a comparison of the performance indicators with other similar firms in the same industry and thus mixes a wide variety of investments within a portfolio. If the investor wants to achieve specified return on the stock.
The bottom-up approach provides a series of information like earning per share and liquidity to investors for constructing a well-diversified share portfolio which minimize unsystematic risk and provide a specific return. 13. A tutor Of a university financial markets class has been asked by a student to explain the random walk hypothesis. A) Explain the main propositions of the random walk hypothesis. The random walk hypothesis is the theory that stock price changes have the amen distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.
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Each share is assumed to have an intrinsic value that is based on expectations of investors about the present value of the firm’s future net cash flow. The price of the share reflects investor’s estimation of the share’s intrinsic value and is based on the latest information available and relevant to the company’s current State and its future prospects. B) Would the observation of increasing prices on a particular share over a rise of consecutive months violate the random walk hypothesis? Explain your response.
The increasing prices on the share would not violate the random walk hypothesis. The random walk hypothesis expressed that variations in the process of the share through time should only be in response to changes in the relevant information that comes to the attention of the market concerning the company. It is reasonable to increase the share prices during a long period of time if the performance of the corporation is outstanding or he demand of export goods from the company is increasing AAA.
Briefly outline the main contentions of the effective market hypothesis. In your answer, discuss the contentions of the efficient market hypothesis within the context Of technical analysis and fundamental analysis. The theory of the effective market hypothesis stated that it is impossible for investor to make abnormal profits through having superior information to that of the rest of the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.
There is no chance of making superior profits from employing the techniques of technical analysis, since these techniques rely almost totally on the assumption that past price patterns will repeat themselves. Also, it argues that employing fundamental analysis to share valuation will not yield superior results for one investor over another. This is because all the information required in either approach should be available to all market participants. B. How can the hypothesis be tested? In your response, distinguish between he weak, semi-strong and strong forms of efficiency.
The efficient market hypothesis has been tested on three different levels, with each level making different assumptions about the degree of information efficiency. Weak form efficiency stated that share prices changes are independent and not based on historic price. Semi- storing form efficiency mentioned that all publicly available information is fully reflected in a share price and strong form efficiency is all publicly available information and private research is fully reflected in a share price.