FIN630 Investment Analysis & Portfolio GDB Solution Fall 2012

Case
Mr. A received Rs.10 million as inheritance. He wants to invest this amount in stock market. One of his family uncles – Mr. Uncle has good amount of experience of working in the Pakistani stock markets. He approached him for an advice to create and accumulate quantum of wealth for his own future. As, he himself is unaware of the stock market functions. Uncle started his advice with a quote – there is no free lunch in the stock market. Every investor has to strive, even for a fractional return. To beat the market is not an easy task, so he advised him to invest but in a smaller amount, being a new entrant in the stock market. He advised him to invest particularly in the month of January in small cap companies. One reason for this is the persistence of certain anomalies in the stock market that have the ability to fascinate many investors. It has been experienced in the past that January is the best month to invest and earn relatively high in the small company stocks. Most of the small-cap companies outperformed in the month of January that is why many investors want to continue to hold the stocks of small-cap companies in the next few weeks.
Requirement: In order to help Mr. A, you are required to explore, does this financial market anomaly – The January Effect exist in Pakistani stock market? Your comment should be supported by logical reasoning.
Note: In order to comment on the above issue, you are required to read the following article. These articles will help you in your comments based on the real time data. Read these articles to take concept from them. Concentrate on the highlighted text in articles. Do not copy material from the articles; write in your own words.

Solution:

Anomalies may offer opportunities. Financial market anomaly – the January effect exist in many stock markets of the world. In this anomaly tendency for small firm stock returns are higher. The January effect is a seasonal abnormality of the stock markets where prices of theses securities tend to high with coming of this January month. Small firms experience large returns in January and exceptionally large returns during the first few trading days of January. The empirical tests indicate that the abnormally high returns witnessed at the very beginning of January appear to be consistent with tax-loss selling.

In Pakistani stock market – The January Effect does not completely exist, in the way it is completely absent from Karachi Stock Exchange market in Pakistan. However some effect does exist. So Mr. A can invest in the month of January but not his entire amount. These is chances to take advantage in Pakistani stock markets regarding this anomaly – ‘the January effect’ but it not surely we can say that there is always higher advantages related to this anomaly in Pakistani stock market environment. Because of this and because of absence of this anomaly from KSE the reason might be fiscal year. The Fiscal year does not end in December unlike other economies of the world rather it end in June. So that’s why investors don’t need to sell their stocks in December. Existence of this anomaly enables to forecast future share prices


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