Question

1. Suppose that Intel announced yesterday that its 4th quarter earnings will be 10% higher than last year's 4th quarter. You observe that Intel had an abnormal return of -1.2% yesterday. Is this possible if markets are efficient? Please explain your reasoning.

2. Consider a Mexican closed-end fund that is a claim to $100 of underlying assets per share and is trading at a price of $150 per share. Explain how you could take advantage of this mispricing, and what risks this strategy entails.

Answer 1

1)

the intel had abnormal return of -1.2% yesterday due to the investors exoected the earnings increase to be larger than what was actually announced.. This may be due to a risky investment being made, or huge capital being invested on a project, or the way the peers & competitors in the industry would have performed well.

2)

• the investor could buy the low priced share and sell the high pricd share
• the investor can construct a zero beta investment portfolio
• the profitable arbitrage opportunities will quickly disappear