Consider the following statement:
"You have been keenly following a pharmaceuticals company called Get Well Ltd, which released its annual earnings figure three months ago. On the day of the announcement, the company's return was 2%, while its expected return on that day was 0.5%. On the day of the announcement, the media indicated that the market was positively surprised by the profit figure. Since the announcement, the company's stock price has continued to increase gradually, to this day."
Critically discuss this statement, in the context of the notion of market efficiency. 
b) You observe the following pure yield curve:

Given the nature of this curve, and using the theories of term structure, discuss the possible reasons for the shape of the yield curve.
c) Security ABC has a beta of 1.25 and an expected return of 13.5% p.a. Security XYZ has a beta of 0.8 and an expected return of 10%. The risk-free rate is 5%. Show that an arbitrage opportunity exists between the two securities. 

Additionally, explain how you would profit from this opportunity, i.e., what would you buy/sell?

Transcribed Image Text:

Yield to Maturity Time to Maturity Yield to Maturity Time to Maturity

Answer rating: 100% (QA)

a In the context of market efficiency the statement provided raises several points for discussion Market efficiency is a theory that suggests that financial markets incorporate all available informati... View the full answer