Asset pricing

Answer the following questions about trading strategies in efficiently inefficient markets.

(a)Discuss how active investors can be compensated for their information collection. Give examples of how you could try to collect information about specific firms and how you could trade on this.

(b)You work as an analyst at a hedge fund. Your manager suggests an investment strategy involving mergers and acquisitions (M&A). He provides anecdotes that suggest that the stock price of the target firm seems to go up once the deal is successful. He suggests a trading strategy that involves buying such firms rightafter the merger announcement, but before the actual merger. Should the hedge fund follow this trading strategy and, if so, what are the risks?

(c) Your manager also notes that the price of the target firm jumps right after the merger announcement. Suggest a trading strategy that might allow the hedge fund to profit from this occurence.