(a) Why are there surprise market crashes? The market should signal this or at least communicate in

a timely fashion. It could be said that insufficient attention has been paid to psychological

factors when explaining stock efficiency anomalies. Outline the efficient stock market hypothesis

(EMH) and describe some of the evidence which casts doubts on the semi-strong level of the

efficient market hypothesis for which psychological explanations might be useful.

(b) The following statements are extracts from the detailed minutes taken at a board meetingof

Advance plc. This company is discussing the possibility of a new flotation of shares on the Nairobi

Securities Exchange.

CFO: 'I have been following the stock market for many years as a private investor. I put great

value on patterns of past share prices for predicting future movements. At the moment my charts are

telling me that the market is about to rise significantly and therefore we will get a higher price

for our shares if we wait a few months. This will benefit our existing shareholders as the new

shareholders will not get their shares artificially cheap. Furthermore, I know of other investors

who have consistently beat this market based on the such techniques. It is like darts board. Where

the darts land, is as good as another, just that group of assets'

Deputy Finance Manager: 'I too have been investing in shares for years and quite frankly have

concluded that following charts is akin to voodoo magic, and what is more, working hard analyzing

companies is a waste of effort. The market cannot be predicted. I now put all my money into tracker

funds and forget analysis. Delaying our flotation is pointless; the market might just as easily go

down. Prices are just but random variables'

Required

Considertheefficientstockmarketstheoryns

theoryandrelateit the

position of CFO and Deputy Finance Manager.