Please see HW2.pdf. I only need the answer of e), Question 2.

Year Index PE Ratio Earnings 1993 11888.39 18.756 633.84 1994 8191.04 11.0465 741.5 1995 10073.39 11.7915 854.29 1996 13451.45 13.3701 1006.09 1997 10722.76 9.5499 1122.81 1998 10048.58 12.2297 821.65 1999 16962.1 13.5553 1251.32 2000 15095.53 18.4033 820.26 2001 11397.21 19.2827 591.06 2002 9321.29 14.4581 644.71 2003 12575.94 17.9366 701.13 2004 14230.14 14.6073 974.18 2005 14876.43 11.6593 1275.93 2006 19964.72 14.987 1332.13 2007 27812.65 16.7174 1663.7 2008 14387.48 13.1677 1092.64 2009 21872.5 15.8591 1379.18 2010 23035.45 12.7542 1806.1 2011 18434.39 9.0034 2047.48 2012 22656.92 11.1462 2032.71 2013 23306.39 11.0066 2117.5 2014 23605.04 9.6204 2453.65 FINA\t3010\t(2016\tFall) Assignment\t2 Available\tonline\tfrom\tNov.\t11th,\t2016 Due\tat: Section\tA:\t9:30AM,\tNov.\t24th,\t2016 Section\tB:\t8:30AM,\tNov.\t23rd,\t2016 Section\tC:\t2:30PM,\tNov.\t24st,\t2016 You\tare\tencouraged\tto\tdo\tthis\tassignment\tin\tgroups\tof\tup\tto\tfour\tpeople\twithin\tthe\tsame\tsection. Each group only needs to submit one answer, and students in the same group will receive same grades.\tLate\tsubmission\tis\tsubject\tto\ta\tpenalty.\tYou\tcan\tsubmit\tyour\tanswer\tat\tthe\tbeginning\tof\tour class\tmeeting,\tor\tsend\ta\tscanned\tcopy\tto\tour\tTA,\tAmanda\tLIU,\tat\txiaoxiliu@baf.cuhk.edu.hk\tbefore the\tdeadline.\tKeep\tin\tmind\tthat\tthe\tUniversity's\tacademic\thonesty\tpolicy\tis\tstrictly\tenforced. Question\t1 (This\tquestion\tis\tto\thelp\tyou\tunderstand\tlimits\tto\tarbitrage\tfrom\tanother\treal-world\tcase) In March 2000, 3Com sold 5% of its wholly owned subsidiary Palm Inc. in an IPO, retaining ownership of the remaining 95%. After the IPO, a shareholder of 3Com indirectly owned 1.5 shares of Palm. Also, 3Com announced its plan to spin off the remainder of Palm within 9 months,\tat\twhich\ttime\tthey\twould\tgive\teach\t3Com\tshareholder\t1.5\tshares\tof\tPalm. a) Suppose the price of 3Com's shares is P(3Com) and the price of Palm's shares is P(Palm). Given the ownership structure mentioned above, what would be the lower bound of P(3Com)\tif\tprice\treflects\tfundamental\tvalue? b) At\tthe\tclose\tof\ttrading\ton\tthe\tfirst\tday\tafter\tthe\tIPO,\tthe\tprice\tof\tPalm\tshares\twas\t$95,\twhile the\tprice\tof\t3Com\twas\t$81. Based\ton\tyour\tanswer\tin\ta),\tis\tthis\ta\tmispricing?\tWhy? c) If\tyour\tanswer\tto\tb)\tis\tyes,\tthen\tyou\tmight\tthink\tthis\tis\ta\tgood\topportunity\tto\tarbitrage\tand make some profits. Illustrate how you would set up the arbitrage portfolio. (hint: the arbitrage\tportfolio's\texposure\tto\tthe\tfundamental\trisk\tof\t3Com\tor\tPalm\tneeds\tto\tbe\tzero.) d) In reality, however, the arbitrage didn't eliminate the mispricing immediately. The mispricing\thad\tbeen\tpersistent\tover\tabout\ttwo\tmonths,\tindicating\tthat\tarbitrage\twas\tnot\tso effective\tin\tcorrecting\tmispricing\tin\tthis\tcase. Namely,\tthere\twere\tsome\tlimits\tto\tarbitrage. For\tthis\tcase,\tcould\tfundamental\trisk\tbe\tthe\tmain\tlimit\tto\tarbitrage? e) For\tthis\tcase,\tcould\tnoise\ttrader\trisk\tbe\tthe\tmain\tlimit\tto\tarbitrage? f) If\tyou\twant\tto\texamine\tif\tthe\timplementation\tcost\twas\tone\tof\tthe\tmain\tlimits\tto\tarbitrage, what\tkind\tof\ttransaction\tcosts\tyou\twould\tlike\tto\tinvestigate? 1 Question\t2 (This\tquestion\tis\tto\tinstruct\thow\tto\tuse\tP/E\tratio\tto\tpredict\tlong-term\treturns\tof\tHang\tSeng\tIndex) Download\tthe\tExcel\tfile,\t\"HW3_data\