The aim of this assignment is to discuss equity share prices with regard to EMH and analyse all forms of investment analysis and research with reference to technical and fundamental analysis to determine if they are actually worthless.

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 The aim of this assignment is to discuss equity share prices with regard to EMH and analyse all forms of investment analysis and research with reference to technical and fundamental analysis to determine if they are actually worthless. Efficiency forms with tests will be highlighted, market anomalies and also Fama’s theory (1965) and other theorist with regard to the weak form and semi-strong form efficiency.

The Efficient Market Hypothesis (EMH) is a measure of how quickly and accurately the market reacts to new information. For instants, if prices react fast to information, then investors will not be able to exploit it at the expense of others, at this stage, it is considered to be a fair game; where there is no systematic difference between actual return on a portfolio of securities given its risk profile and the expected return on that security. On the other hand, if prices react slowly, then those with information would have an advantage and could make greater gains over those without, and they would be able to beat the market (make abnormal profit).

EMH is an idea partly developed in the 1960s by Eugene Fama. It states that it is impossible to beat the market because prices already incorporate and reflect all relevant information. This is also a highly controversial and often disputed theory. Supporters of this model believe it is worthless to search for undervalued stocks or try to predict trends in the market through  or .

Technical analysis strategy is a process of evaluating securities by analyzing statistics generated by  activity, such as past prices and volume. Technical analysts or (chartists) do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.  Technical analysts believe that the historical performance of  and markets are indications of future performance. For example, a fundamental analyst would go to firms, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would base their decision on the patterns or activity of people.

Fama (1970) made a distinction between three forms of EMH: the weak form, which states that excess returns cannot be earned by using investment strategies based on historical share prices uses correlation which is a numerical measure of linear relationships between variables; to run tests on the linear relationship between current and past return and run tests which analyses whether there are runs of negative or positive returns and eliminates the effect of large observations.; long sequences of positive and negative runs suggest predictability which is a contradiction of EMH, however it is in agreement with technical analysts, if there are many runs these are more difficult to predict and is therefore consistent with EMH not with technical analysts. Also filter rule tests, which is a trading rule regarding the actions to be taken when shares rise or fall in the value by a certain percentage. Filter rules should not work if the markets are weak form efficient.

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Evidence for weak form, Kendall & Alexander (Corhag 1987) shows the relationship of returns in the UK at various periods (1, 2, 4, 8 and 16 weeks) using price as a variable, when examining the data collected, the average correlation coefficient showed at 16 weeks was 0.156 which is the highest correlation from the data suggesting there is little correlation between return and returns in prior periods. If the weak form efficiency were to hold, then technical analysis will produce forecasts on the average of no profits.

Returns are assumed to follow a random walk theory. Burton Malkiel (1973) states ...

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