Problem. This section hastrue/false questions. You must justify your answer dete

Question

Problem. This section hastrue/false questions. You must justify your answer determine credit. a) True or False: It is not optimal to put positive weight on an active portfolio when its alpha is 0 (b) True or False: Mortimer and Randolph have access to the crop report before all other traders. This report indicates that the unseasonably cold winter has affected the orange crop. After instructing their trader to buy as many futures contracts as possible for frozen concentrated orange juice (FCOJ), other traders notice this behavior and mimic it. However, Louis and Billy have switched the crop report, which is revealed to all the traders when the real report is announced, causing all of the traders to close out their positions by selling FCOJ futures contracts. Louis and Billy knew the true report and made a massive profit. This scenario does not violate any versions of the efticient market hypothesis

Explanation / Answer

a) True. Alpha is generated through manager's performance. He takes care of the timing of market etc to outperform the benchmark return and this is only possible when alpha is more than 0. Or else the stock will mimick bechmark and it will like a passive portfolio rather than active portfolio.

b) False. the above case violates the Effecient market hypothesis which states that all the information is known to public and it is actired in the price. but over here we see that mortimer and randolph has access to the crop report and so they traded in future to get hedged against the severe cold weather that would affect the orange crop.  

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