Alex and Francesco are brothers who have different approaches to dealing with their investment portfolios. Alex is happy to invest passively; he will analyze the market once at the beginning, acquire the most suitable investment, and will hold onto the investment for a longer period as compared to his brother. Alex will normally review his stock investment performance twice a year. Over the years, Alex has built up a portfolio that currently weighs RM250,000. His portfolio is well diversified across industries although it is heavily weighted in high quality, income stock, and blue chips stocks. He will reinvest his dividends and will add investment capital to his portfolio every year.

Francesco on the other hand spends more than 2 hours per day studying technical analysis with aim of entering and exiting the market at the most precise time. Francesco, to his advantage, can receive market information in advance, as he has some connections in politics and market insiders. Unlike his brother, he practices all sorts of trading strategies including short selling to optimize his profit. As a result, he has managed to collect proceeds of about RM180,000 over the years.

They both feel the market has pretty much run its course and the pandemic situation is making things worse. As such, they believe they might need to change their strategy to protect their profit. However, again, their strategy is different.

Alex’s Strategy:

Alex is now thinking of reinvesting half his future dividends into purchasing physical gold to store the value.

Alex is also aiming to change his approach by tailoring market movement to ensure that he is not left behind the mass-market reaction.

To avoid the decline of his portfolio value, Alex plans to sell the winning stocks in his portfolio and invest the proceeds in a fixed deposit account.

Francesco’s Strategy:

Believing that the market will have a long bearish period, Francesco is seeking more inside information from his connection to identify potential losing stocks to practice short selling.

Francesco is also aiming to spend more of his investment on cryptocurrency as he believes digital assets are the best alternative to store value.

To ensure he does not lose track of the market, Francesco aims to invest in the stock index futures.

Identify and list any three violations to the efficient market hypothesis on their strategy that you can find. Explain how the violations of the strategy could lead to an inefficient market.