Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

7) You are a portfolio manager (PM) at a small hedge fund and one of your analysts thinks they have identified a new trading

image

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

To determine if the suggested strategy is profitable we need to compare the actual returns with the ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Marketing

Authors: Charles W. Lamb, Joe F. Hair, Carl McDaniel

12th edition

111182164X, 978-1133708582, 1133708587, 978-1111821647

More Books

Students also viewed these Finance questions

Question

What are the elements of Methods marketing mix?

Answered: 1 week ago

Question

10. Provide an adequate debriefing for research participants.

Answered: 1 week ago