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

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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?

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