Corporate Finance

This document provides study material and solved assignments on the topic of Corporate Finance. It covers various concepts such as efficient market hypothesis, financial market anomalies, CAPM, risk and return trade-off, and more. The document also includes references for further reading.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the student
Name of the university
Author’s note:

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Table of Contents
Question 2..................................................................................................................................2
Efficient market hypothesis........................................................................................................2
Violating the semi strong form..................................................................................................3
Financial market anomalies........................................................................................................4
Explaining the CAPM................................................................................................................5
Risk and return relation in an inefficient market.......................................................................5
Risk return trade off in inefficient market..................................................................................6
References..................................................................................................................................7

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Question 2.
An anomalies means a situation or a circumstance where a security or a group of
securities represent a contrary in their performance to the notion of the efficient market. This
refers to the occurrence of an unusual performance depending on the market information with
in an efficient market hypothesis. A market anomalies explain the market pattern which may
cause by random market information changes. As some of the information are caused by the
changes in the financial report this represents a challenge into the semi strong form of the
EMH. This indicates that the fundamental analysis does not reflects the same value for the
individual investor. As per efficient market hypothesis a stock is properly priced in the
efficient market as price of the security includes all the information (Akbas et al. 2015).
Efficient market hypothesis
According to the EMH, an efficient market represent a stock price at a fair value
where all the information such as current information and the future expectation on earnings
and dividends gets included. An abnormal return can to be earned through the misprice of the
stock. EHM refers a behavioural finance where the market trade proves an indication of price
increase or decrease with following a proper pattern. This also reflects the impossibility for a
stock or for a portfolio to outperform the whole market through expert stock selection and or
understanding market timing. Since the stock price changes with the new information
updates, the future stock price cannot be predicted. However, there is a market pattern where
chance of earning or an abnormal return through violating efficient market hypothesis is
present, particularly in the semi strong form. This is because; this state neglects the public
information that is being served into the semi strong form of the EMH.
This predicts that it is not possible to earn abnormal profit just by learning all the
accessible information on the companies and their available stocks or any other variable that
has an impact on the stock price, such as economic factor. Hence, thus the semi strong form

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of EMH ignores the value of fundamental analysis. Although with the internal information
update into a stock that cannot be helpful for the investors to make an exact predict over the
stock’s price increase or decrease. This may outperform while there is a possibility of
occurrence of abnormal information and same is informed to the investors (Hamid et al.
2017).
Violating the semi strong form
The semi strong form of the Efficient Market hypothesis refers to a market form
where the efficient market reflects the historical information as well as the current public
information. The semi strong form extend to the public information other than the market
information, acquired from the company management, financial report and company product
information. This form of efficient market follows a belief that, as all information is used by
the public for the calculation of current stock price, the investors cannot apply fundamental or
technical analysis for the calculation to gain a higher return. The loopholes can be used for
the generation of the high risk adjusted return through the information collection that are not
readily available to the public. In such a way the investors boosts their return to a
performance level above the market return. It is considered that the semi strong form of the
efficiency does not provide information related to the material non-public information.
Considering the fact that this phase of efficiency does not provide any opportunity to make
any company analysis through using technical or fundamental analysis, superior gains can
only be achieved through the adoption of the material non-public information where the
investors seek to earn benefit through earning above average return on investment (Archana
et al. 2014).
As the information associated with the stock price gets rapidly changed with the
update of the new information, the investors find this difficult to calculate or to identify the

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return. Hence investors earn their portion of profit through the effective use of non-public
information.
Financial market anomalies
Anomalies are the indicator of the occurrence of an unusual event into the market
which puts huge effect on the stock price. This reflects an inefficient market where the
opportunity of outperformance gets generated. In this way the inventors looks to get more
return on their investment without using the public information as suggested into the semi
strong form of the efficiency. While the market information has been judged, the inefficient
market does not reflect the true value of the financial statement. This includes the non-public
information that suggests the bargains are available (Fischer and Krauss 2018).
EHM fails to explain the market anomalies including the speculative babbles and the
excessive amount of volatility of the stock. The public information into the semi strong form
does not include the market volatility as the public information reflects he market pattern
only. The market anomalies defers with the EMH as the anomalies occurs with the
occurrence of inefficient market and due to the effective use of the non-public information.
This results in the violation of the utilisation of the public information into an efficient
market. However this helps in earning more return for the investors in a short time period. In
the semi strong form of efficiency the market anomalies are not explained by the traditional
pricing model. In this semi strong form of the efficiency, the systematic occurrence of the
violation has been recognized in the equity market due to the effect of timing. Such
occurrence of the event makes a significant difference between return on investment and
expected returns. Therefore, with such kind of advantage of anomalies one can earn superior
market return over a stock. Within the strong form of efficient market the market anomalies
theory states that under-developed or emerging market once suffers from the market
inefficiency at a specific calendar time period. Due to higher correlation in between the world

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indices, the international diversification has reduced its charm. However, in recent times it
has become utmost important for professionals and as well as for individuals to study and tap
such abnormalities (Rossi 2015).
Ignoring the semi strong form of the efficiency the market anomalies occurs during
the selected calendar period such as: turn of the month effect, turn of the year effect, Friday
of the 13th effect and lastly the weekend effect reflect the market anomalies through ignoring
the public information which is reflected by the stock price (Pallais 2014).
Explaining the CAPM
The capital assets pricing model has been followed to acquire the expected return or
the risk adjusted return. This explains a future rate of return of an underlying assets that are
expected after taking a specific amount of risk. This compares the risk with the return.
Therefore both the elements represents a high level of relationship in the effective market
place. Investors calculates the expected return using CAPM method as the investors finds the
scope of investment into a portfolio through maximizing return. This does not differentiate
the assets type for the investment opportunity as long as the investment generates high rate of
return. Regardless the probability of future return it has a nature of being different in future.
The beta value represents the risk associated with the stock (Zabarankin, Pavlikov and
Uryasev 2014).
Risk and return relation in an inefficient market
The inefficient market does not reflect a true value of the company’s financial
statement hence; this reflects a risk while calculating a risk adjusted return. The inefficient
market represents the violation of the semi strong form of the efficiency where the
information are being collected based on the non-public information. These are the
information that does not provide any reliable sources. There the risk associated with the

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information limits the opportunity to include the fundamental or technical analysis (Ghysels,
Plazziand and Valkanov 2017).
Following the CAPM model, this includes the market volatility through the
representation of the beta value. Hence, this helps in identifying the periodical risk associated
with the stock. This generates a state where the higher return has been expected with the
adoption of the high amount of risk. Therefore, a high beta is measured with the high
systematic risk which would give a high return in an in-efficient market (Cremers, Hallingand
and Weinbaum 2015). Therefore, following the information in an inefficient market provides
a high beta. Investment in inefficient market has been done by the investors to earn a high
return through the violation of the efficient market hypothesis. The motivational factor into
the inefficient market has been recognised while the investment has been done with the
expectation of earning higher return. As the inefficient market provides more opportunity to
earn more profit through taking more risks, this helps in generating more investment
opportunity into capital market (Baker, Bradley and Taliaferro 2014).
Risk return trade off in inefficient market
The inefficient market represents a high risk hence investors expects higher return.
The risk return trade off in an inefficient market depends on various factors. Such as:
Investor’s risk tolerance, the investor’s years to retirement and lastly the potential to replace
the lost fund. As previously explained that in an inefficient market the market anomalies
occurs in a different calendar periods, hence time plays an essential role in determining a
portfolio return with the specific level of risk. Furthermore, following the CAPM model the
long term investment in an inefficient market generates low risk which is represented through
low beta value while on the other hand the relation reflects an inverse value for the investor
(Kinnunen 2014).

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References
Akbas, F., Armstrong, W.J., Sorescu, S. and Subrahmanyam, A., 2015. Smart money, dumb
money, and capital market anomalies. Journal of Financial Economics, 118(2), pp.355-382.
Archana, S., Safeer, M. and Kevin, S., 2014. A study on market anomalies in Indian stock
market. International Journal of Business and Administration Research Review, 1(3), pp.128-
137.
Baker, M., Bradley, B. and Taliaferro, R., 2014. The low-risk anomaly: A decomposition into
micro and macro effects. Financial Analysts Journal, 70(2), pp.43-58.
Cremers, M., Halling, M. and Weinbaum, D., 2015. Aggregate jump and volatility risk in the
cross‐section of stock returns. The Journal of Finance, 70(2), pp.577-614.
Fischer, T. and Krauss, C., 2018. Deep learning with long short-term memory networks for
financial market predictions. European Journal of Operational Research, 270(2), pp.654-
669.
Ghysels, E., Plazzi, A. and Valkanov, R.I., 2016. The risk-return relationship and financial
crises. Available at SSRN 2776702.
Hamid, K., Suleman, M.T., Ali Shah, S.Z., Akash, I. and Shahid, R., 2017. Testing the weak
form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.
Kinnunen, J., 2014. Risk-return trade-off and serial correlation: Do volume and volatility
matter?. Journal of Financial Markets, 20, pp.1-19.
Pallais, A., 2014. Inefficient hiring in entry-level labor markets. American Economic
Review, 104(11), pp.3565-99.
Reinganum, M.R., 1983. The anomalous stock market behavior of small firms in January:
Empirical tests for tax-loss selling effects. Journal of Financial Economics, 12(1), pp.89-104.

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Rossi, M., 2015. The efficient market hypothesis and calendar anomalies: a literature
review. International Journal of Managerial and Financial Accounting, 7(3-4), pp.285-296.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM)
with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.