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Finance Term Paper

In: Business and Management

Submitted By dipita
Words 729
Pages 3
University of Texas at Dallas
Jindal School of Management

FIN4300
Problem Set #3
Fall 2014
Important note: Please submit paper copy of your solutions
Due Dates: Dec. 8 for Section 002 and Section 501; Dec. 9 for Section 001 (all in-class)

1. Suppose you are a portfolio manager at Paulson & Co. Inc. Today is the last day of
April 2013. Your portfolio did not do well in the most recent month. After learning about the post earnings announcement drift, you decide to give it a try. You gather most recent earnings information on 100 stocks as of April 30 2013. After examining the earnings surprises, you decide to buy an equally weighted portfolio of the top 10 stocks with the most positive earnings surprises. At the same time, you decide to short sell an equally weighted portfolio of the bottom 10 stocks with the most negative earnings surprises. Suppose the dollar amount for both the long and short is based on
$10 million. The data for this exercise is included in the excel file SUE final q3.xlsx.
(a) Suppose you hold your portfolios for one quarter (from May 1, 2013 to July 31,
2013). What is the return from your long-portfolio? What is the return from your short-portfolio? What is the return from the combined long-short portfolios?
(b) Given the return you find from the above exercise, is it consistent with efficient market hypothesis? If yes, state the reason; if not, which form of EMH is violated and why? 2. (a) Many traders claim to observe patterns in stock market prices and use technical analysis to guide their trading activities. Is it consistent with the efficient market hypothesis if traders can earn abnormal profit using technical analysis? If not, what form of market efficiency is violated?
(b) During a trading day Green Jacket Golf Inc. announces that it has lost a contract for a large golfing project that, prior to the news, it was widely...

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