Suppose that an investor selects companies; A and B from the Johannesburg stock exchange. He observes that for the past ten years company A yielded an average investment return that is twice that of B. Explain whether this contradicts the efficient market hypothesis.[3 marks]

2.John is a sophomore (second year student) at the North West University business school. He has just finished lectures on investment management in his financial management module. He borrowed R500000 from the bank and invested in a portfolio of equities listed on the Johannesburg stock exchange. He believes that his investment in the portfolio of shares should be actively managed otherwise he will suffer great losses. Explain whether his belief is justifiable according to the efficient market hypothesis[3 marks]

3.Are there any advantages that can be obtained from insider trading if the market is strong form efficient? Explain[3 marks]

4.In South Africa the national lottery is run weekly. In this lottery the purchaser of a ticket selects six different numbers from 1 to 50 inclusive. If those same six numbers are then drawn randomly from a hat on live television, the ticket holder wins a share of a large cash sum equal in value to the total ticket sales. Explain whether the South African market for lottery tickets is weak form efficient.[4 marks]

5.During the MBA study school at the North West University last summer, four students decided to form an investment club. They made the following proposals for the new equity investment for the club:

I.George proposes that they buy shares in South32 ltd because it has performed poorly during the past two years and so they are due for an upturn.

II.Grace wants to invest in Sibanye Gold ltd. There is a rumour that they have appointed the head of marketing. This new employee is believed to have had success at other companies. So Grace felt that this new employee will have a positive effect at Sibanye Gold ltd.

III.Tshepo believes in selecting shares at random. He recommended that they buy shares in FNB ltd.

IV.Peter wants to buy shares in Dischem ltd. His brother works for Discovery health ltd and has insider information that Dischem ltd's shares will rise sharply in the near future when it is announced that Discovery health ltd has appointed Dischem ltd as its pharmacy of choice.

Explain the share selection strategy of each member in light of the following:

a)strongly efficient,

b)semi-strongly efficient,

c)weakly efficient and,

d)inefficient markets[16 marks]

6.

a)State the assumptions of the mean- variance portfolio theory (3 marks)

b)What conditions need to be met for the investment market to be perfect (3 marks)

c)What is meant by "risk aversion"? [2 marks]

d)Suppose that a market has two portfolios Q and Z to invest in. Portfolio Z is a portfolio of a single risk free assets. Portfolio Q is a portfolio of risky assets.

Required:

I.Explain the nature of the efficient frontier of these two portfolios. You must clearly state your assumptions[8 marks]

II.Explain the relationship between the efficient frontier in part (I) and portfolio Q [10 marks]

III.Suppose that the investors in this market have homogeneous expectations. Explain the nature of the efficient frontier facing them. [4 marks]

IV.Using your answer in part(II) explain the relationship between risk aversion and portfolios Q and z [6 marks]

7.

i.What is the key result of CAPM? (3 marks]

ii.The Johannesburg Stock exchange (JSE) consists of all listed companies in South Africa. Suppose the JSE has only 12 million investors. Also assume that an investor holds 5% of shares in Capitec Bank. NB (Capitec is listed on the JSE)

Required:

a.Apply the logic of the key result of the CAPM to explain the JSE as a marketof risky assets [7 marks]

8.Attempt the MINI Case study in your prescribed textbook,chapter 4, on page 134 [15 Marks]

Answer rating: 100% (QA)

1 The efficient market hypothesis EMH states that asset prices reflect all available information making it impossible to consistently achieve aboveaverage returns through stock selection or market tim... View the full answer