7) You are a portfolio manager (PM) at a small hedge fund and one of your...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
7) You are a portfolio manager (PM) at a small hedge fund and one of your analysts thinks they have identified a new trading opportunity. Specifically, they think the market initially underreacts to positive earnings announcements by Matt's Beer Co. The analyst suggests that you should buy the stock on the earnings announcement day (if the news is positive) and hold it for one trading day. Your analyst provides the following evidence to support this claim: January 15th The market expected Matt's Beer Co. to report earnings of $0.50 per share however the firm reported earnings of $0.58 per share. The next day, on January 16th, the stock price increased by 1.5%. April 15th The market expected Matt's Beer Co. to report earnings of $0.45 per share however the firm reported earnings of $0.48 per share. The next day, on April 16th, the stock price increased by 0.8%. September 15th The market expected Matt's Beer Co. to report earnings of $0.82 per share however the firm reported earnings of $0.86 per share. The next day, on September 16th, the stock price increased by 1.9%. You know that the firm has a beta of 1.8, the risk-free rate is 0.1%, and that the market return was 1% on January 15th, 0.6% on April 15th, and 1.3% on September 15th. a) Should you agree to the strategy suggested by your analyst? Why or why not? 7) You are a portfolio manager (PM) at a small hedge fund and one of your analysts thinks they have identified a new trading opportunity. Specifically, they think the market initially underreacts to positive earnings announcements by Matt's Beer Co. The analyst suggests that you should buy the stock on the earnings announcement day (if the news is positive) and hold it for one trading day. Your analyst provides the following evidence to support this claim: January 15th The market expected Matt's Beer Co. to report earnings of $0.50 per share however the firm reported earnings of $0.58 per share. The next day, on January 16th, the stock price increased by 1.5%. April 15th The market expected Matt's Beer Co. to report earnings of $0.45 per share however the firm reported earnings of $0.48 per share. The next day, on April 16th, the stock price increased by 0.8%. September 15th The market expected Matt's Beer Co. to report earnings of $0.82 per share however the firm reported earnings of $0.86 per share. The next day, on September 16th, the stock price increased by 1.9%. You know that the firm has a beta of 1.8, the risk-free rate is 0.1%, and that the market return was 1% on January 15th, 0.6% on April 15th, and 1.3% on September 15th. a) Should you agree to the strategy suggested by your analyst? Why or why not?
Expert Answer:
Answer rating: 100% (QA)
To determine if the suggested strategy is profitable we need to compare the actual returns with the ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
In Equation (8.2), the cost of raw materials, C RM , is multiplied by a factor of 1.23. The reason for this is that, in general, the estimated cost of raw materials is expected to be about 20% low...
-
The table gives the percent of U.S. residents who participated in no leisure-time physical activity, categorized by race or origin. (a) What is the probability that a Black person participated in no...
-
Torque required to turn a friction bearing (Fig. 3A.1). Calculate the required torque in lbs- ft and power consumption in horsepower to turn the shaft in the friction bearing shown in the figure. The...
-
For the Grunfeld example, replicate Tables 13.6, 13.7 and 13.8, i.e., (i) obtain the Breusch and Pagan test based on the fixed effects residuals using Stata's command xttest2. (ii) obtain Pesaran's...
-
Continental Photo, Inc., is a portrait photography company. Alex Riley, a black man, applied for a position as a photographer with Continental. Riley submitted an application and was interviewed. In...
-
While taking the measurement of a different sphere with a radius of r = 2 . 2 2 cm , your instrument has a measurement uncertainty of \ pm 0 . 0 4 cm . What is the propagated uncertainty of the...
-
Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of...
-
5. Apollion has two manufacturing facilities, two storehouses, and three consumers. The locations of these are as follows: Manufacturing Facilities: Germany and France Storehouses: Denver and New...
-
When preparing a statement of cash flows using the indirect method, what information is needed? What documents or statements would be used?
-
The nation with the lowest cost of production has: a. a comparative advantage b. an absolute advantage c. an unfair advantage d. a competitive advantage
-
Describe the process for reconciling net income to the cash basis. What items are added to net income? What items are subtracted from net income?
-
Large firms can take advantage of: a. natural monopoly b. monopoly pricing strategies c. economies of scale d. collusion
-
Describe the difference between the direct and the indirect methods of preparing the operating section of the statement of cash flows.
-
Your client has the following properties which they have disposed of in 2020. ACB Proceeds Boat $ 1,000 $ 1,800 Jewelry $ 600 $ 1,300 Sculpture $ 3,600 $ 700 Freezer $ 250 $ 650 Shares - public...
-
The words without recourse on an indorsement means the indorser is: a. not liable for any problems associated with the instrument. b. not liable if the instrument is dishonored. c. liable personally...
-
What are the elements of Methods marketing mix?
-
What is the relationship between demand and price for products on the 6pm.com e-commerce site?
-
Discuss the various product modifications which Ford made to the Ford Explorer.
-
Eq. 7.36a is written for the conservation of momentum in y direction. Obtain Eq. 7.36-b wherein the stream function is independent variable. Eq. 7.36(a,b) y - v v +(1-y/R)v- + momentum: u u R-y + R P...
-
Show that the derivative of the boundary layer edge velocity is given by Eq. 7.64 for the figure given below. Eq. 7.64 M>>1 Ue dx R dy/dx = 1/R
-
Using Maslen method, find the approximate value of pressure and density at the junction of the sphere and the cone of Problem 7.29 at Mach number 8. Problem 7.29 An empirical way to determine shock...
Study smarter with the SolutionInn App