Principles of Investments assignment

Name:

The answers should be typed on the word document and submitted by Blackboard. Students will have until JUST BEFORE class next week to submit. This means 6 PM EST October 7.

1. Tesla currently has a beta of 1.64. On Aug 7, 2018 Tesla stock traded at $339. Midway through the day Elon Musk Tweeted the following:

“Am considering taking Tesla private at $420”

This Tweet upset the Securities Exchange Commission and was against securities law.[1] The stock price went from $339 to $387 before dropping back to $379.

Explain what these price movements mean. Why would the price move at all? Why would the stock price move up? Why not to $420? Why would it move up to $387 and then back to $379?

You should use information about the probability of the acquisition occurring in your answer and consider the value to shareholders if the firm goes private versus the value to shareholders if the firm does not go private. The best answer will contain words like “new information.”

2. Suppose you have combined five stocks into a minimum variance portfolio. All five of the stocks are technology firms. You weight the stocks according to the minimum variance portfolio which has weights as follows: Stock A: 23%; Stock B: 22%; Stock C: 27%; Stock D: 18%; Stock E: 10%. Then Stock A goes through a merger with an industrial firm. What would you expect this to do to the variance of the portfolio you currently hold? If you have the ability to rebalance the portfolio, what would be the most likely rebalancing in terms of Stock A? Do you expect you would purchase more of Stock A, sell some of your Stock A position, or keep the same position?

3. Grossman and Stiglitz (1980) said, “Without fundamental analysis the markets would surely be inefficient, & abnormal profit opportunities would exist, leading to profitable fundamental analysis”

What exactly does this mean? Are they saying markets are efficient or markets are not efficient? This is labeled a conundrum in the slides. What does that mean?

4. What does it mean to outperform the market? We talked in class about how to generate high returns – just buy high beta (risky) stocks. Explain what it means to outperform the market and what this has to do with market efficiency.

[1] No need to read this, but here is an article about this Elon Musk Tweet about taking the firm private. https://www.businessinsider.com/elon-musk-tesla-private-one-year-anniversary-2019-8#am-considering-taking-tesla-private-at-420-1