An investor is evaluating the use of the bottom-up approach and the top-down approach to fundamental analysis. The investor wants to use the approach that will best enable them to structure a diversified share portfolio that will achieve specified income returns and capital gains. Which approach do you recommend the investor adopt? We can use bottom-up approach to make a comparison of the performance indicators with other similar firms in the same industry and thus mixes a wide variety of investments within a portfolio. If the investor wants to achieve specified return on the stock. The bottom-up approach provides a series of information like earning per share and liquidity to investors for constructing a well-diversified share portfolio which minimise unsystematic risk and provide a specific return.
A tutor of a university financial markets class has been asked by a student to explain the random walk hypothesis. a) Explain the main propositions of the random walk hypothesis.
The random walk hypothesis is the theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement. Each share is assumed to have an intrinsic value that is based on expectations of investors about the present value of the firm’s future net cash flow. The price of the share reflects investor’s estimation of the share’s intrinsic value and is based on the latest information available and relevant to the company’s current state and its future prospects.
b) Would the observation of increasing prices on a particular share over a series of consecutive months violate the random walk hypothesis? Explain your response.
The increasing prices on the share would not violate the random walk hypothesis. The random walk hypothesis expressed that variations in the process of the share through time should only be in response to changes in the relevant...
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