Explain why each of the independent statements below is false. A good explanatio

Question

Explain why each of the independent statements below is false. A good explanation should be between two and four sentences for each part.

• A mutual fund manager is concerned that the value of a portfolio of Treasury Bonds (average maturity = 15 years) will decrease as interest rates increase over the next three months. To construct the best hedge over this three month period he should sell T-Bill futures contracts.

• If the stock market is semi-strong form efficient, historical earnings information – and other public accounting information – cannot help an analyst explain where a stock is currently trading within its 52 week range. (i.e., why the stock price is at the high end, the low end, or the middle of this range).

Explanation / Answer

Answer to first part - As the Market seems to be bearish ( going down ) in recent future due to increase of interest rate over next three months. so in bearish phase we prefer to take a short position i.e sell position so the best way to construct the hedge is to sell T-bill future contracts as a price fixed today to be sold in future..

Answer to Second Part - There are three variants of effeciency : weak, semi strong and strong form

under weak effecinecy hypothesis claims that prices traded already reflects all past publicly availbale information but on the contrary the semi strong hypothesis claims that price reflects all publicly availbale inofrmation but tends to change instantly in relation to new public information available and the last variant which is strong form claims that price instantly even in raltion to insider information

so under semi strong form

Price will touch high end when there will be favourable new public available information and low when information available publicly is unfavourable and middle range when no such new information available

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