1) In the context of the efficient market hypothesis (EMH), explain what it means for a stock

market to be efficient. Describe two (2) examples when the stock market price reaction may
be called inefficient. (5 m)

Ans: Market efficiency refers to the degree to which market prices reflect all available, relevant
information. If market is efficient, then all information is already incorporated into prices, and so
there is no way to beat the market because there are no undervalued or overvalued securities
available.

The examples when the stock market price reaction may be called inefficient is when all publicly
available information about a stock is not reflected in the price, suggesting that bargains are
available or that prices could be over-valued. Thus, in an inefficient market, some investors can
make excess returns while others can lose more than expected, given their level of risk exposure.

2) Discuss briefly the efficient market hypothesis and distinguish between its three forms of
efficiency. (5 m )

Ans: Efficient market hypothesis is the security prices that reflect all available information
concerning a firm and its prices fully incorporate known information. The prices change
rapidly to known information. There are three forms of efficiency which are:
a) Weak Form Market Efficiency
Security prices reflect all information found in past prices and volume.
b) Semi-strong Form Market Efficiency
Security prices reflect all publicly available information.
c) Strong Form Market Efficiency
Security prices reflect all information which includes private and public company.

Jwpan miss: For EMH, it state that the share price fully reflect all available information. And
the share price adjust immediately to new information.

Weak form
-reflect information on past prices or historical prices
- technical analysis useless

Semi-strong
-reflect past information and all publicly available information
- fundamental analysis useless

Strong form
-reflect all information (past, public and private)
- technical, fundamental, insider information useless

[12:31 PM, 4/19/2020] +60 17-285 7727: kena tau characteristic of 3 types tu weak semi
and strong
[12:32 PM, 4/19/2020] +60 17-285 7727: so untuk semi..dia reflect past and public
avaialable information
[12:32 PM, 4/19/2020] +60 17-285 7727: utk strong..dia reflect all past, public and private
 so untuk strong..bila dia reflect semua past, public and private..meaning that technical
analysis,fundamental analysis and insider information is useless

3) Assume that the Bursa Malaysia stock market is weak form efficient. Explain whether
investors can earn abnormal profits on their share investments if they rely on:
• Technical Analysis
• Fundamental Analysis

Ans: technical ni based on past prices..or past information

fundamental based on public information about a company

So dekat sini..if investor rely on technical analysis..the investors cannot gain any abnormal
profit. It is because everyone tau information yg sama which is based on past prices..so
everyone can predict what will happen next.. everyone can predict the pattern of the prices.
That is why they cannot earn more profit

Kalau fundamental.. investors can earn the abnormal prices sbb fundamental rely on publicly
available information contohnya annual report. Utk Investor yg advance or lebih
knowledgeable mayn dia akan baca annual report company yg dia nk invest so.dia dpt laa
information lebih..so dia lebih cepat dpt information dr Investor yg xbaca annual report..that
is why dia boleh earn abnormal profir

Fundamental Analysis: Yes because fundamental analysis is based on public information

about a company. Since even updated public information is not spread freely and easily,
some people know that information, but not all people. The ‘knowledgeable’ public people
with this information can use it to do fundamental analysis to help them predict share price
and beat the people who don’t know it.

Technical Analysis: No because it is still not affective because it is based on past share price
and we assume all people know past prices unlike updated public information

3) The efficient market hypothesis implies perfect forecasting ability among investors

(False – An efficient market may not be perfect.)

False. Market efficiency implies that prices reflect all available information, but it does not imply
certain knowledge. Many pieces of information that are available and reflected in prices are
fairly uncertain. Efficiency of markets does not eliminate that uncertainty and therefore does not
imply perfect forecasting ability.

4) A market which is semi-strong form efficient is also weak form efficient