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

Question

1. 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. Treasury Bonds are long term instruments and any change in interest rates will affect Treasury Bonds more significantly than T-Bill which are short term instruments having a lower yield than T-Bonds. Thus as interest rates increase value of Treasury Bonds will decrease more than T-Bills and the same cannot be hedged by selling T-Bill futures contract which has a lower yield and hence lower effect on price due to change in interest rates.

2. The statement is false because under semi-strong form of effcient market hypothesis the stock price is arrived at after considering all historical and publicably available current information and no investor can earn excess return by trading on that information. The investor needs new information to make a return. Thus historical earnings information and other public accounting information can help an analyst explain where a stock is currently trading within its 52 week range.

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