Reference no: EM131903211

a) Fairfux asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above average returns without assuming higher risk. The semi strong form of the efficient market hypothesis (EMH) assets that all publicly available information is rapidly and correctly reflected in securities prices. This assertion implies that investors cannot expect to derive above average returns from purchases made after the information has become public because security prices already reflect the information.

i) Identify and explain three examples of empirical evidence that tend to support the EMH implication stated above.

ii) Identify and explain three examples of empirical evidence that tend to refute the EMH implication stated above.

b) X Ltd recently paid an annual dividend on its stock of Shs.2 per share. The divided is expected to grow at Shs.l per share for the next four years. Thereafter the dividend is expected to grow at 5 % per year indefinitely. The required rate of return on stocks with similar risk is 12%. 'What is the intrinsic value of X Ltd.’s stock?