You are watching the news in the evening and you learn that a tropical storm in Gulf of Mexico has just been upgraded to hurricane status. It is expected to hit the entire Gulf Coast of the Unites States and destroy most of the sugar beet farms. Your friend suggests that you should purchase stock in C&H Sugar because they produce only pure cane sugar from outside the gulf region, and its stock price will surely rise after the storm damages its competitors.

a. Is it likely that you can make abnormally high returns by using this information to buy stock in C&H Sugar? Why or why not?

b. Suppose that your dad works at US Weather Bureau. He calls you late at night, and tells you that there are some cloud movements that could lead to an enormous storm. We’re holding this information for now, because we don’t want to create panic, until we get to coordinate with local authorities to decide whether they will order evacuation or not. Can you earn abnormally high returns using this information? Why or why not?

c. What will happen to the price and returns to stock in C&H Sugar if you and others decide act on the information provided in part b. Explain why.

2. Can a person with rational expectations after reading the newspaper, expect the price of a share of Google to rise by 20% in the next week?

3. What could potentially happen if Fed loses its independence and becomes a branch of the government?

Answer rating: 100% (QA)

1a Based on the news about the tropical storm in the Gulf of Mexico you cannot make abnormally high returns by buying stock in C H Sugar While it is true that CH Sugar produces only pure cane sugar fr... View the full answer