Evaluate the empirical evidence on the predictability of excess stock Coursework - 2

Evaluate the empirical evidence on the predictability of excess stock returns using technical analysis - Coursework Example There exist two means of evaluating a stock to make investment decisions. These include fundamental analysis and technical analysis. Fundamental analysis deals with studying the company in details and making the characteristics that make its value identified for decision-making. Technical analysis on the other hand looks at the factors of supply and demand. Technical analysis considers the application of the study on the market factors of the company, their effects on the price and factors of demand and supply. Technicians pay attention to the prices of the market and make predictions based on their understanding of the effect that information may have on the stock. They depend on the market efficiency hypothesis in making their decisions. To obtain a full view of market inefficiency, one needs to obtain returns over a long span to evaluate a company’s performance since stock prices changes slowly as per information provided (Fama, 1997, p.284). The changes sometimes close to zero providing no effect unless huge funds are invested in the counter to provide the power of quantity. The market of technical analysis depends on the market anomalies though may not provide a good picture of the actual market position. The use of information to determine the ability of the stock to provide massive returns to the investors is tricky and may at times provide misleading information to the investors. The use of a different approach to technical analysis that considers the studying of the model that describes the cash flows of the firm discounted by pricing aspects may deliver a positive correlation between the current returns expected and the past returns that the firm made (Johnson, 2002, p.585). Understanding this and applying it in the analysis to top up on the market and price study of the technical analysts would provide confident answers to predicting a stock’s