Question 1

Plus factors
- A systematic and structure approach
- Macro and market factors influence more than 50% of stock market; industry influence
another 13%
- Facilitates top-down analysis, which is logical (companies’ performance affected by industry
and economic environment the company operates in)

Minus factors
- Tedious and time consuming process, results of analysis may be too late to be useful
- Despite its logic and systematic process, no guarantee of picking a successful investment
using the EIC approach
- EIC approach does not consider unpredictable factors like wars, assassinations, etc. that do
affect returns on securities
- Success of EIC in the developed markets; may not be relevant in less developed markets –
basic information required to do analysis may be lacking
- Top-down approach – will miss out on some good companies with strong management and
leading industry positions because they operate in poor economies/industries

Interesting factors
- If everyone uses EIC with perfect information – would there even be trading in investment
instruments?
- Man-in-the-street investor do not have resources to do EIC analysis – what approaches do
they use successfully?
 bottom-up... focus on company (working in that industry)
 technical analysis… look at prices charts
 contrarian approach… go against the majority… based on conventional
wisdom that the masses is usually wrong
 Rely on those who have such skills e.g. professional fund managers and
invest via unit trust?
 Use rumours… but often wrong
 User insider trading… but it is illegal if caught

Question 2
a)
- June 28, 2002: Kim Eng’s Eric Foo asked fellow dealer, Victor Chan, to use trading account
of a client (Pauline Neo) to trade in Leong Hin shares.
- Victor Chan knew that Eric Foo intend to use the account to manipulate the market for Leong
Hin shares.
 June 28 – Sep 30, 2006, victor Chan executed orders for Leong Hin shares, based on
Eric Foo’s instructions
 Victor Chan created a false market (price and volume) of Leong Hin Holdings shares by
executing those trades using the account of Pauline Neo.
- Chan Lye Huat was sentenced to 3 months jail for rigging the shares of Mainboard-listed
Leong Hin Holdings.
- vs. $150,000 fine for a similar offence by an uncle of Chan brothers of Leong Hin Holdings.
- The maximum sentence could have been a fine of up to $250,000 or a jail sentence of up to 7
years or both

c)
- By rigging the shares, a false market in Leong Hin Holding shares created – cause losses for
other buyers or sellers of Leong Hin shares who were not aware that the shares was no trading
on a willing buyer and willing seller basis.
- The ethical issue involved here is that Victor Chan, being a dealer’s representative (or
stockbroker) shows a lack of integrity by creating a false market in Leong Hin shares.

Question 3
a)
Two criteria are often used:
- Returns (or performance) of their Buy/Sell recommendations vs. a benchmark (usually an
industry index)
- Accuracy of their forecasts (usually their earnings forecasts)

b)
- Sell side refers to intermediaries such as stockbrokers who will need to “sell” their research
ideas to external customers like fund managers who may act on those recommendations
- ‘Buy side’ analysts would then be analysts working for end users of research such as fund
management companies.

c)
- The method chosen will measure the performance of an analyst’s stock recommendation
independent of the impact of the stock market (or that particular industry’s stocks)
- i.e. it will be based purely on “alpha” rather than “beta”.
- Beta refers to the sensitivity of a stock to overall stock market movements;
- While alpha refers to return in excess of the beta impact.

Question 4
a)
2000: 162,162.3/147,834.4 – 1 = 0.0097 or 9.7%
2001: 159,073.0/162,162.3 – 1 = -0.019 or -1.9%
2002: 162,493.2/159,073.0 – 1 = 0.022 or -2.2%
2003: 164,265.9/162,493.2 – 1 = 0.011 or 1.1%

b)
- 2000’s 9.7% real GDP appeared to be too strong (possibly inflationary and thus unsustainable)
which turned out to be an economic peak
- 2001 showed negative real GDP growth which is known as recession
- 2002 and 2003 were periods of economic trough followed by expansion, following the 2001
recession. However, the low growth rate of 1-2% p.a., which was significant below 2001’s
9.7%, most likely meant that Singapore was still below its potential GDP level.