Question

In the context of the efficient market hypothesis: a) Describe the weak form, the semi-strong form and the strong form of capital market efficiency. (9 Marks) b) Which form, if any, do you favor and why? (3 Marks) c) In your opinion, in what form is our Zambian capital market and why. (4 Marks) d) What should be done, if any, to bring it to the form you favour? (4 Marks) [TOTAL: 20 MARKS]

investment analysis

Answer 1

a. Efficient market hypothesis:

security prices already reflect all the available information.

They are 3 levels of Market efficiency:
1. Strong efficiency: Insider information, fundamental analysis and technical analysis are unless in such a market.
2. Semi- Strong: fundamental analysis and technical analysis are unless in such a market.
3. Weak: technical analysis is unless in such a market.  

b. I favour the weak form of efficient markets because there can active investment strategies which can be involved to make abnormal returns. the equity research analysis is something I like to do & it is favoured in such market conditions because Fundamental analysis is useful in the weak form of efficiency.

c. Zambian Capital market seems to be in between Inefficient market to Weak form of efficiency.
Because it's an underdeveloped nation & one can take advantage of insider information fundamental analysis and technical analysis in such a market condition.

d. 4. To make the Zambian capital market at least a weak form of efficiency. We need to adopt the following.

Weak form of efficiency says that past price movement, earnings report and volume traded doesn't affect stocks Current price and can't be used to predict the stocks future directions.

In simple words, past performance doesn't guarantee the future performance of the stock price moment.

So we should ensure that there is no correlation between historical returns and current returns. The stock return should follow a random path.

Whereas In the weak form of efficiency fundamental analysis and Insider Information are useful.