ANSWER

(a)

FUNDAMETAL THEORY OF SHARE VALUE

The Modigliani-Miller theorem (M&M) states that the market value of a company is correctly calculated as the present value of its future earnings and its underlying assets, and is independent of its capital structure.

At its most basic level, the theorem argues that, with certain assumptions in place, it is irrelevant whether a company finances its growth by borrowing, by issuing stock shares, or by reinvesting its profits.

DIVIDEND IRRELEVANCE THEORY

Dividend irrelevance theory holds the belief that dividends don't have any effect on a company's stock price. A dividend is typically a cash payment made from a company's profits to its shareholders as a reward for investing in the company. The dividend irrelevance theory goes on to state that dividends can hurt a company's ability to be competitive in the long term since the money would be better off reinvested in the company to generate earnings.

Although there are companies that have likely opted to pay dividends instead of boosting their earnings, there are many critics of the dividend irrelevance theory who believe that dividends help a company's stock price to rise.

DIFFERENCE BETWEEN THE THEORIES

(b)

(i) EFFICIENT MARKET HYPOTHESIS

The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.

According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments.

(ii)

COEFFICIENT OF CORRELATION OF INVESTMENT PORTFOLIO

Modern portfolio theory (MPT) asserts that an investor can achieve diversification and reduce the risk of losses by reducing the correlation between the returns of the assets selected for the portfolio. The goal is to optimize the expected return against a certain level of risk.

The modern portfolio theorist recommends that an investor measure the correlation coefficients between the returns of various assets in order to strategically select those that are less likely to lose value at the same time. That means determining to what extent the prices of the assets tend to move in the same direction in response to macroeconomic trends.