Question

Please list three anomalies against Efficient Market Hypothesis. Explain the methods you will exploit the opportunities based on the listed anomalies respectively. (20%)

Answer 1

The 3 main anomalies of the efficient market hypothesis are:
1. The size effect.
2. The valuation effect.
3. The momentum effect.

How to exploit the anomalies of the efficient market hypothesis:

The size effect:
Research shows,
The companies with small market capitalisation have outperformed historically compared to those companies with larger market capitalisation.

The valuation effect:
The companies with low P/B ratio has outperformed historically, compared to those companies with high P/B ratio.

The momentum effect:
Companies that have performed better in the past 6 months to 1 year tend to perform better in future then compared to companies that have performed worst during the same period.