Part A: Analysis of Predictability and Efficiency of PT Astra Agro Lestari Tbk and PT Kalbe Farma Tbk
Market efficiency, predictability and its importance for stock traders and/or other market participant
There is a saying that no one can beat the market systematically when market is efficient because no one can predict the return. Market is said to be efficient when all available information fully and quickly reflected in the security price. Efficiency can be achieved when market is perfectly competitive where there is no transaction cost (or lower than expected profit), no transactional delay and all traders behave rationally.
Perfect competitive market made arbitrage trading (buy in one market and sell in another market) possible…show more content… Investors cannot predict future value using past value (or past error) because price changes from one period to the next period, hence technical analysis will be useless.
Security’s prices in semi-strong form fully reflected all publicly available information, including its all past value. Investors cannot obtain abnormal return by using fundamental analysis. While strong form efficiency is achieved when security prices fully reflect public and privately held information, including past value. As a consequence, information can be obtained by every participant and no one can achieve systematic abnormal return.
Market can be weak-form but not semi-strong or strong but strong form efficient market must be weak-form and semi-strong.
Investment strategy in efficient and not efficient market
If market is efficient, investors should adopt passive investment strategy (buy and hold) rather than active strategy because active strategy will underperform due to transaction cost. Investor will buy asset that they think the intrinsic value is lower than market value, and vice versa.
If the market is not efficient, investors will buy securities that replicate market index portfolio, which is in the efficient frontier line and have low transaction cost.
Technical way of expressing market efficiency
E [(Rt+1 – Rf) ǁ Ωt ] = 0, where Rt = rate of return; Rf = return on risk-free assets; Ωt = relevant information available at t.
Market is efficient if