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C2/Group 5
Antoine Bernard, Choo Rui Bin, Wojciech Bronisz, Mikolaj Benesiewicz

The statement implies that capital markets and casinos are all a game of chance. However,
this is not true. While stock prices follow a random walk in the short-term, if the price of a
stock is expected to increase over a period of a few years, it will eventually do so, thus
generating positive returns. This is different from a casino, where the probabilities remain
constant throughout.

According to the EMH, prices are determined by information available. Consequently, it is
not possible to beat the market and expertise selections of stocks are worthless. Thus, this
statement implies that selecting randomly stocks is as efficient selecting them
methodically. I think it depends on the number of assets selected. With a low number of
stocks, a portfolio built by actively managed funds should be more efficient than a random
portfolio, in theory. However, the difference between the two portfolios could decrease in
the long term. By selecting stocks and using correlation between stocks we may create a
portfolio that would have lower standard deviation and therefore more predictable
returns. On the other hand, when drawing stocks from the box we can't control it.

While a company’s future prospects might be predictable, it is unlikely that the stock prices
will rise in a constant upwards trajectory, given the influence on the prices of
unpredictable information. It is still likely to follow a random walk but on a gradually
increasing path as the price levels of stock markets from the beginning of their existence.
Higher predictable volatility implies higher risk which implies higher expected returns, but
this statement doesn't violate EMH, as higher predicted volatility doesn't give means to
predict abnormal returns

This is consistent with the EMH. In an efficient market, there is a 50% chance that an
investor will beat the market, so it is logical that about half the mutual funds will
outperform the market index.

This violates the EMH. As security practices adjust rapidly to the arrival of new
information, the stock price should have adjusted accordingly in August once the
announcement of improved earnings were made, instead of only taking effect in

This violates the EMH. In an efficient market, there is a 50% chance that an investor will
beat the market and every year is independent of one another. Thus, the performance of a
fund in previous years would not have any bearing on its potential performance the next

This strategy is quite effective when the market is consistently going up and down, as
dollar-cost averaging effectively reduces risk when the stock price is high. However, during
a major recession, this strategy should not be employed. To exhibit good market timing in
this case, one should optimally wait for the market to turn up again before purchasing
1. According to the Grossman and Stigliz paradox, if markets are efficient and
information is expensive, then agents have no interest in paying for information. In
an efficient market, the price of an asset contains all the available information.
Therefore, agents will be incentivized to stop paying for information since they can
obtain it free of charge by observing the evolution of the prices of listed assets on
the market. As a result, if no agent has an incentive to pay for information, the price
of the asset will no longer include all available information and the market will not
be efficient.
2. Another empirical evidence that refutes the EMH is the ‘Post-Earnings
Announcement Drift’. EMH states the semi-strong and strong forms of EMH
immediately absorb into prices all the publicly available information. However, the
empirical evidence has shown that it is possible to earn abnormal returns in the
days post earnings announcement. It appears that the market adjust to earnings
announcement gradually, but not immediately as EMH states.

1. In general professional money managers do not typically earn higher returns than
comparable risk, passive index strategies as EMH predicts.
2. Tests of technical analysis, in general, find difficulties in identifying price trends that can
be used to extract some superior risk - adjusted investment returns.

In a semi-strong EMH, the stock price is deemed to have factored in all public information,
but not private information. Investor may choose not to buy a stock in a semi-strong
efficient market if he posses insider information that suggests a decrease in the prices of
index in upcoming time.
- Concept​: Mental Accounting: Mrs Tan is willing to take a risk with bonus that she
would not take with the money coming from her main activity. When making a
investment decision she takes into account the source of the funds, and
consequently segregates the accounts and risk appetite according to the source of
- Counterargument: ​Money is fungible. Regardless its origin, it has the same chance
to realize a positive return.

- Concept: Anchoring: Mrs Tan while accessing the current value of stocks relies too
much on a past price point called 'Anchor'. It is highly likely that the original cost of
purchasing stocks doesn't reflect their current value, so it shouldn't be taken into
account while making a decision about selling stocks. Mrs Tan should make the
decision using current information available.
- Counterargument: ​According to the random walk theory, past prices do not have
any impact on future returns.

- Concept: Small Size neglect and representativeness: Mrs Tan is too quick to infer a
pattern of trend from small sample. She makes her decision on purchasing stocks
from India based on the analysis of only the last 5 years, which is too small a period
of time to make such far reaching conclusions that the India market will continue to
outperform other markets.
- Counterargument: ​According the Efficient Market Hypothesis the past market
information is already incorporated in prices and cannot be used to predict future
returns. As a result outperformance of India market in last 5 years doesn’t indicate
that it will continue in the future.


I would not buy Shawn’s product, because in general it violates every assumption of
efficient market hypothesis. The EMH states it is impossible to beat the market because
stock market efficiency causes existing share prices to always incorporate and reflect all
relevant information. Financial product offered by Shawn suggests that some constant
cycles exist among stock market which are independent from informations released by
companies. If the calendar could really exist, investing in stock would not make any sense,
because everyone would know how the prices would behave in the future, so we would
have long periods of inactivity and periods of booming interest (when calendar indicates to
invest). He also assumes that he is able to outperform constantly and this is of course
impossible. Every investor from time to time is intended to suffer the consequences if the
bear market. There are some exceptions like Warren Buffett who consistently beaten the
market over long period of time, but they are not using calendar based algorithms. Rather
taking higher risk with better evaluation. What is more Shawn is inconsistent in his
thoughts. He ensures the viewer that he is able to predict the crashes before they happen,
as he did in 2008, but when we take a look onto the chart of the ‘prime season calendar’
and ‘absolute profits’ we may observe that share prices fall is similar to market one. In
general charts of Shawn’s portfolio are just a multiplicated charts of S&P500.

a) There are 46 instances in which the index crosses through its moving average from
below. In 23 weeks following a cross through the index increases whereas in 23
b) There are 45 instances in which the index crosses through its moving average from
above. In 26 weeks following a cross through the index increases whereas in 19
c) From the observations presented above we may reach a conclusion that the moving
average rule performs poorly as in around 50% of cases the movement of index in
the week following a cross through was in line with the moving average rule.
Furthermore, in around 30% of cases in the week following a cross through the
index cut through moving average from the opposite side. In order to be consistent
with moving average rule an investor would need to perform immediately another
buy/sell order, which would increase the costs of such strategy substantially due to
transaction costs.


14/8/06 1302.30 BUY

12/2/07 1455.54 SELL

HPR 11.76%

Networkdays 131

Annualised 23.74%

Before our indicated point of the bullish signal, the market index was below the 26-week
moving average for a period of about 5 months. During this period, we see that the market
index had attempted to broach the 26-week MA line 3 times, but failed each time. However,
after the 3rd unsuccessful attempt in August 2006, the index only fell by a bit before
increasing again. This provides a good foreshadowing for a potential bull run.