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

1) The mutual fund is concerned about interest rates falling which would imply that bond prices would increase. Therefore the Manager should buy call options to guarantee a certain purchase price.

2) It can certainly because in this kind of hypothesis private information is quite useful for the stock price calculation.

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