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INTRODUCTION OF BACKGROUND COMPANY

Lafarge Malayan Cement (LMC) is the leader in the Malaysian cement


industry. Incorporated in 1950, its first cement plant was built in Rawang in 1953.

LMC is today the parent of a group of companies in Malaysia and Singapore whose
core businesses are in the manufacturing and sale of cement, ready-mixed concrete
and other related building materials.

In the Cement business, LMC currently employs more than 1,200 people and
operates a nationwide network of facilities, which includes three integrated cement
plants in Langkawi, Kanthan and Rawang, a grinding plant in Pasir Gudang and
distribution channels by road, rail and sea.

It employs more than 80 people in its Aggregates business and operates four
quarries in Malaysia.

Whereas in its Concrete business, there are more than 30 batching plants
throughout Peninsular Malaysia and East Malaysia with a workforce of more than
300 employees.

Lafarge is the world leader in building materials, with top-ranking positions in all of its
businesses: Cement, Aggregates & Concrete and Gypsum with 78,000 employees
in 78 countries. In 2010 and for the sixth year in a row, Lafarge was listed in the
'Global 100 Most Sustainable Corporations in the World'. With the world's leading
building research facility, Lafarge places innovation at the heart of its priorities,
working for sustainable construction and architectural creativity. Today, our
innovations also help make our homes and buildings more energy-efficient, improve
working conditions and reduce construction site disturbance, opening the way to
sustainable construction. Innovation gives life to our strategy, and we bring
materials to life.

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QUESTION 1

Event: Price of sugar, petrol, LPG, diesel to go up Friday

This event can be classified as systematic risk. This event have related with
this company LAFARGE MALAYAN CEMENT BHD. This event had been reported
at 15 July 2010 and the evident was reported in news paper the star. Systematic risk
means any risk that affects a large number of assets, each to a greater or lesser
degree.

This event have effect on the great number of company either in


manufacturing, transporting, consumer product, chemical product, construction,
financial and many more. So this event is called systematic risk since it affects a
large number f company not only in one sector.

In this event the increasing price of petrol and diesel have effect company
expenses. This because the company have many Lorries and heavy machine that
require petrol and diesel to operated. The reduction in petrol and diesel subsidies
will make the overhead expenses increase. Examples Company usually delivered
cement to construction site since the construction site cannot move on, so the
company need Lorries to transfer the cement from the source to construction site.
The company only have 3 site cement plant that is Langkawi, Kanthan and Rawang
so the cost to delivered cement from Rawang to Melaka or Johor will take a lot of
cost especially diesel cost.

If we see the chart, it show that at the of event date the share price goes
down little bit due to announcement of the increasing petrol and diesel since it will
effect company operation as manufacturing company. However on the next day
where the event takes place, it shows that the share price of LAFARGE is rapidly
increased. This show the increasing of RM0.05 of petrol and diesel will not affect
company performance greatly. So at the next day 16 July 2010, the company also
have announced that they will sale of minority interest in LAFARGE MALAYAN
CEMENT BERHAD. That why the share price at the next day has been increase
rapidly. You can see the chart by viewing this address
http://investing.businessweek.com/research/stocks/charts/charts.asp?
ticker=LMC:MK or in the next page will show the chart for 6 month and 3 month.

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Event: Alexandra Rocca appointed as senior vice-president, communication of
Lafarge

The appointed Alexandra Rocca as the senior vice-president was announced


at 7 august 2010. This event is called as unsystematic risk. Unsystematic risk means
risk that specifically affects a single assets or a small group of assets. The
unsystematic risk usually affect internal company itself usually under management,
financial, operation and more that related with inside company itself. So every
changing in company internally will affect company itself. Thus other company or
competitors would not have any effect of the internal changes of that company.

In this event Alexandra Rocca was appointed to be senior vice-president,


communication of Lafarge to replace the Sara Ravella who joined the L’oreal group.
Due to appointed of Alexandra Rocca the share price show that there is increased at
the date the event took place. The share price change after the announcement of
Alexandra Rocca as senior vice-president, communication of Lafarge. It shows that
the market is efficient at the date the event take place.

The evidence of the event can be show in the chart at


http://investing.businessweek.com/research/stocks/charts/charts.asp?
ticker=LMC:MK and the event address at http://www.lafarge.com/wps/portal/6_2_1-
CADet?
WCM_GLOBAL_CONTEXT=/wps/wcm/connect/Lafarge.com/AllPR/2010/PR100708/
MainEN

So as conclusion for the unsystematic risk, the market is efficient due to


response of change senior vice-president, communication of Lafarge where
Alexandra Rocca takes position.

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QUESTION 2

Comment and explain the following situations based on your understanding on


Efficient Market hypothesis (EMH).

a) If a market is semi-strong form efficient, is it also weak form efficient?

The efficient market hypothesis (EMH) states that at any given time, security
prices fully reflect all available information. There are three common forms to
describe the efficiency of the market which are weak form efficiency, semi-strong
form efficiency and strong form efficiency, each of which have different implications
for how markets work.

Based on EMH, the weak form efficient market asserts that all past market
prices and data are fully reflected in securities prices. In other words, technical
analysis is of no use. On the other hand, the semistrong form efficient market
asserts that all publicly available information is fully reflected in securities prices. In
other words, fundamental analysis is of no use. It is referred to all information
available in annual reports, news clippings and gossip columns. Each new piece of
information an analyst gathers should be carefully considered with regard to whether
it is already impounded in the stock price. The easier it was to get, the more likely it
is to have already been traded upon. It seems likely that there is value to publicly
available information. However there are probably degrees to which information
really is public knowledge.

For conclusion, since weak form efficient market which used past prices is
deemed public information, weak form efficiency implies semi-strong form efficient
market which also used public information.

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b) Playing the stock market is like gambling. Such speculative investing
has no social value other than the pleasure people get from this form of
gambling.

Playing the stock market can be gambling or not, this is because it depend on
the rationality f the person itself. The stock market is similar with gambling in the
sense of poker. In poker it is possible to consistently beat the other players if you are
better than the other players at the game.

There are people that play the stock market like a game of roulette - throw
your money at a random stock and leave the rest to luck - but this is more a
(normally short-lived) style of trading rather than something inherent in the stock
market. People that believe in the "random walk" theory, that stock prices change by
random unpredictable fluctuations, are essentially saying that gambling and stocks
are the same, and that the only way to beat the odds is to be on the other side of the
table - running the casino (being an investment bank or broker) rather than playing
the roulette (buying and selling stocks).

People that believe in the "investment" perspective say that investments are
not gambling at all - in the long run (10-20 years) a good investment strategy gives
high returns with small risk and benefits society along the way, so it is more like
running a business than gambling.

My view is that the primary difference between gambling and business is one
of attitude: In business you will look for ways to minimize risk and maximize profit,
and will abandon approaches that do not have the potential for consistent returns in
the long run. Contrast with gamblers who keep taking high risks for a negative
expected return, and are always hoping for an elusive stroke of luck to turn the
tables. If we think of it this way, some professional poker players may be considered
more businessmen than gamblers. Stock traders come in both variants, there are
both gamblers and businessmen among them. Investments carry risks, so does
business. But it is often possible to minimize the downside and maximize the upside.
If you keep looking for ways to do this, and walk away from a deal/bet/investment
when the risk-to-reward ratio is not to your liking, I think it is business rather than
gambling. The stock market can be used either way, it is mostly a matter of how you
approach it.

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Speculation is financial action that does not promise safety of the initial
investment along with return on the principal sum. Speculation typically involves the
lending of money or purchase of assets, equity or debt but in manner that has not
been given through analysis or is deemed to have low margin of safety or significant
risk of the loss of the principal investment. The speculative investors have more
social value than pleasure people get from this form of gambling. This because the
speculative investor make a little bit analysis based on the rumour and speculation
however the people that based on gambling does not make any analysis and they
usually refer to luck itself.

Primary speculators in financial market can be categorized into Individual,


financial institution and Industrial Corporation. If financial markets are efficient,
mangers should not waste their time trying to forecast the movements of interest
rates and foreign currencies. Their forecasts will likely be no better than chance. And
they will be using up valuable executive time. This is not to say, however, that firm
should flippantly pick the maturity or denomination of their debt in a random fashion.
A firm must choose these parameters carefully. However the choice should be based
on others rationales, not on attempt to bet the market.

So in my opinion I would like t say that speculative investor have more social
value than people that take form of gambling.

c) Several celebrated investors and stock picker frequently mentioned in


the financial press have recorded huge return on their investments over

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the past two decades. Does the success of these investors invalidate
EMH?

Yes it invalidated efficient market hypothesis. The efficient market hypothesis


(EMH) has implications for investor and for firms, first because of information is
reflected in price immediately, investor should only expect to obtain normal rate of
return. Awareness of information when it’s released does an investor no good. The
price adjusts before the investor has time to trade on it. Second firm should on
expect to receive fair value for securities that they sell. Fair means that the price they
receive from issuing securities is the present value. Thus, valuable financing
opportunities that arise from fooling investors are unavailable in efficient capital
market.

The price walks randomly, so it will difficult to obtain abnormal gain in two
decades. It is impossible to gain abnormal gain, if the investor used insider
information they actually violating EMH and the information is illegal.

In the weak form the investor cannot obtain abnormal gain because this form
is using past or historical information. Thus, the event already past and it difficult to
for investor t match the market price in current since the price walk randomly.

In the semi-strong form the investor can obtain abnormal gain because it
happens by using past and publicly available information. The current information will
help investor to determine the potential change in the share price itself. However it
difficult to obtain abnormal gain since every investor will think the same way. So,
usually investor can obtain normal profit only. For the answer in above question,
even in the semi-strong form the investor will get rare abnormal profit so to obtain the
huge return for the past two decades is impossible.

In the strong form the investor can obtain abnormal gain since the information
get from inside of market. It because if the one investor has information that no one
else has, it likely that he/she can obtain profit from it, However this insider
information is illegal act. It hard t believe that the market is so efficient that someone
with valuable inside information cannot prosper from it.

So for conclusion, investor can obtain abnormal profit in semi-strong and


strong form, however it difficult and impossible to continue have huge return for the
two decades because the price walk randomly.

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d) The EMH implies that all mutual funds should obtain the same expected
risk-adjusted returns. Therefore, we can simply pick mutual funds at
random. It is true?

It was true that efficient markets hypothesis (EMF) implies all mutual funds
obtain the same expected risk-adjusted return and we can simply pick mutual funds
at random.
According to EMF, the basic assumptions are that higher returns can only be
achieved by accepting higher investment risk and lower returns is due to lower
investment risk. In general larger funds with higher total assets of established fund
families were preferred as they are more common investment target. Measures of
risk clearly match anticipated values. Most risky are small growth stocks and large
value are associated with lowest risk. For investor it may be interesting that large
growth portfolios were less risky than small value.
For conclusion, efficient markets hypothesis claims that portfolios with the
same risk provide the same returns. Therefore it can be assumed that historical
returns of the mutual funds do not have any future indicative value.

e) During a trading day, Guthrie Bhd announces that it had lost a contract
for a large housing project that, prior to the news, it was widely believed
to have secured. If the market is efficient, how should the stock price
react to this information if no additional information is released?

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The issue that Guthrie Bhd faced was considered as unsystematic risk that
was sometimes called specific risk, idiosyncratic risk, residual risk, or diversifiable
risk, is the company-specific or industry-specific risk in a portfolio, which is
uncorrelated with aggregate market returns. Unsystematic risk can be mitigated
through diversification. The announcement about company that had lost a contract
for a large housing project was only effect the company itself rather that the market
as a whole. In efficient market, before the announcement of the event, the share
price increase due to the secured of the project. However, after the announcement of
the event, the stock price of the company will be decease. The graph below illustrate
the movement of share price of the company. The event date is referred to the date
of announcement of losing the project, A is referred to share price before
announcement and B is share price after the announcement.

f) Some people argue that the efficient market hypothesis could not
explain the 1987 market crash or the high price earnings ratio of internet
stocks during late 1990s. What alternative hypothesis is currently used
for the two phenomena?

This two phenomena can presented as empirical evidence supportive of market


efficiency. Crashes and bubbles can be suitable hypothesis for the year 1897 and
1990s

The Market Crash of October 1987

On october19, 1987, the stock market crash is extremely puzzling. the market
dropped between 20 percent and 25 percent on a Monday following weekend during
little surprising news was released.

Can the October 1987 market crash be explained by rational considerations, or does
such a rapid and significant change in market valuations prove the dominance of
psychological rather than logical factors in understanding the stock market?

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Behaviourists would say that the one-third drop in market prices, which occurred
early in October 1987, can only be explained by relying on psychological
considerations since the basic elements of the valuation equation did not change
rapidly over that period. It is, of course, impossible to rule out the existence of
behavioural or psychological influences on stock market pricing. But logical
considerations can explain a sharp change in market valuations such as occurred
during the first weeks of October 1987.

A number of factors could rationally have changed investors’ views about the proper
value of the stock market in October 1987. For one thing, yields on long-term
Treasury bonds increased from about 9 percent to almost 10 ½ percent in the two
months prior to mid-October. Moreover, a number of events may rationally have
increased risk perceptions during the first two weeks of October. Early in the month,
Congress threatened to impose a “merger tax” that would have made merger activity
prohibitively expensive and could well have ended the merger boom. The risk that
merger activity might be curtailed increased risks throughout the stock market by
weakening the discipline over corporate management that potential takeovers
provide. Also, in early October 1987, then Secretary of the Treasury James Baker
had threatened to encourage a further fall in the exchange value of the dollar,
increasing risks for foreign investors and frightening domestic investors as well.
While it is impossible to correlate each day’s movement in stock prices to specific
news events, it is not unreasonable to ascribe the sharp decline in mid-October to
the cumulative effect of a number of unfavourable “fundamental” events. As Merton
Miller (1991) has written, “… on October 19, some weeks of external events, minor in
themselves… cumulatively signalled a possible change in what had been up to then
a very favourable political and economic climate for equities and many investors
simultaneously came to believe they were holding too large a share of their wealth in
risky equities.”

Share prices can be highly sensitive as a result of rational responses to small


changes in interest rates and risk perceptions. Suppose stocks are priced as the
present value of the expected future stream of dividends. For a long-term holder of
stocks, this rational principle of valuation translates to a formula:
r = D/P + g,

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Where r is the rate of return, D/P is the (expected) dividend yield, and g is the long-
term growth rate. For present purposes, consider r to be the required rate of return
for the market as a whole. Suppose initially that the “riskless” rate of interest on
government bonds is 9 percent and that the required additional risk premium for
equity investors is 2 percentage points. In this case r will be 11 percent (0.09 + 0.02
= 0.11). If a typical stock’s expected growth rate, g, is 7 percent and if the dividend is
$4 per share, we can solve for the appropriate price of the stock index (P), obtaining
0.11 = 07.04$+P
P = $100.
Now assume that yields on government bonds rise from 9 to 10 ½ percent, with no
increase in expected inflation, and that risk perceptions increase so that stock-
market investors now demand a premium of 2 ½ percentage points instead of the 2
points in the previous example. The appropriate rate of return or discount rate for
stocks, r, rises then from 11 percent to 13 percent (0.105 + 0.025), and the price of
our stock index falls from $100 to $66.67:

The price must fall to raise the dividend yield from 4 to 6 percent so as to raise the
total return by the required 2 percentage points. Clearly, no irrationality is required
for share prices to suffer quite dramatic declines with the sorts of changes in interest
rates and risk perceptions that occurred in October 1987. Of course, even a very
small decline in anticipated growth would have magnified these declines in
warranted share valuations.
This is not to say that psychological factors were irrelevant in explaining the sharp
drop in prices during October 1987—they undoubtedly played a role. But it would be
a mistake to dismiss the significant change in the external environment, which can
provide an entirely rational explanation for a significant decline in the appropriate
values for common stocks.

The Internet Bubble of the Late 1990s

Another stock market event often cited by behavioralists as clear evidence of the
irrationality of markets is the Internet “bubble” of the late 1990s. Surely, the
remarkable market values assigned to internet and related high-tech companies
seem inconsistent with rational valuation. I have some sympathy with behavioralists
in this instance, and in reviewing Robert Shiller’s (2000) Irrational Exuberance I
agreed that it was in the high-tech sector of the market that his thesis could be

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supported. But even here, when we know after the fact that major errors were made,
there were certainly no arbitrage opportunities available to rational investors before
the bubble popped Equity valuations rest on uncertain future forecasts. Even if all
market participants rationally price common stocks as the present value of all future
cash flows expected, it is still possible for clear excesses to develop. We know now,
with the benefit of hindsight, that outlandish and unsupportable claims that being
made regarding the growth of the Internet (and the related telecommunications
structure needed to support it). We know now that projections for the rates and
duration of growth of these for “new economy” companies were unsustainable. But
remember, it was the sharp-pencilled professional investors who argued that the
valuations of high-tech companies were proper. Many of Wall Street’s most
respected security analysts, including those independent of investment banking
firms, were recommending Internet stocks to the firm’s institutional and individual
clients as being fairly valued. Professional pension-fund and mutual fund managers
over-weighted their portfolios with high-tech stocks.

While it is now clear in retrospect that such professionals were egregiously


wrong, there was certainly no obvious arbitrage opportunity available. One
could disagree with the projected growth rates of security analysts. But who
could be sure, with the use of the Internet for a time doubling every several
months that the extraordinary growth rates that could justify stock valuations
were impossible? After all, even Alan Greenspan was singing the praises of
the new economy. Nothing is ever as clear in prospect as it is in retrospect.
Certainly, the extent of the bubble was only clear in retrospect.

Not only is it almost impossible to judge with confidence what the proper
fundamental value is for any security, but also potential arbitrageurs face additional
risks. Shleifer (2000) has argued that noise trader risk limits the extent to which one
should expect arbitrage to bring prices quickly back to rational values even in the
presence of an apparent bubble. Professional arbitrageurs will be loath to sell short a
stock they believe is trading at two times its “fundamental” value when it is always
possible that some greater fools may be willing to pay three times the stock’s value.
Arbitrageurs are quite likely to have short horizons since even temporary losses may
induce their clients to withdraw their money.

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While there were no arbitrage opportunities available during the Internet
bubble that adjusted returns, and while stock prices eventually did adjust to
levels that more reasonably reflected the likely present value of their cash
flows, an argument can be maintained the asset prices did remain “incorrect”
for a period of time. The result was that too much new capital flowed to
Internet and related telecommunications companies. Thus, the stock market
may well have temporarily failed in its role as an efficient allocator of equity
capital. Fortunately, “bubble” periods are the exception rather than the rule
and acceptance of such occasional mistakes is the necessary price of a
flexible market system that usually does a very effective job of allocating
capital to its most productive uses.

Other Illustrations of Irrational Pricing

Are there not some illustrations of irrational pricing that can be clearly ascertained as
they arise, not simply after a bubble has burst? My favorite illustration concerns the
spin off of Palm Pilot from its parent 3-Com Corporation during the height of the
Internet boom in early 2000. Initially, only 5 percent of the Palm Pilot shares were
distributed to the public; the other 95 percent remained on 3-Com’s balance sheet.
As Palm Pilot began trading, enthusiasm for the shares was so great that the 95
percent of its shares still owed by 3-Com had a market value considerably more than
the entire market capitalization of 3-Com, implying that all the rest of its business had
a negative value. Other illustrations involve ticker symbol confusion. Rasches (2001)
finds clear evidence of co-movement of stocks with similar ticker symbols; for
example, the stock of MCI Corporation (ticker symbol MCIC) moves in tandem with
an unrelated closed-end bond investment fund Mass Mutual Corporate Investors
(ticker symbol MCI).. In a charming article entitled “A Rose.com by Any Other
Name,” Cooper, Dimitrov, and Rau (2001) found positive stock price reactions during
1998 and 1999 on corporate name changes when dot com was added to the
corporate title. Finally, it has been argued that closed-end funds sell at irrational
discounts from their net asset values (for example, Shleifer, 2000).

But none of these illustrations should shake our faith that exploitable arbitrage
opportunities should not exist in an efficient market. The apparent arbitrage in the
Palm Pilot case (sell Palm Pilot short and buy 3-Com) could not be undertaken
because not enough Palm stock was outstanding to make borrowing the stock

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possible to effectuate a short sale. The “anomaly” disappeared once 3-Com spun off
more of Palm stock. Moreover, the potential profits from name or ticker symbol
confusion are extremely small relative to the transactions costs that would be
required to exploit them. Finally, the “closed-end

fund puzzle” is not really a puzzle today. Discounts have narrowed from historical
averages for funds with assets traded in liquid markets and researchers such as
Ross (2001) have suggested that they can largely be explained by fund
management fees. Perhaps the more important puzzle today is why so many
investors buy high expense, actively managed mutual funds instead of low cost
index funds.

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