(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 meeting of 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

Consider the efficient stock markets theory and the rational expectations theory and relate it the position of CFO and Deputy Finance Manager.