Question

​Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials are​ successful, Apnex stock will be worth

$ 68$68

per share. If the trials are​ unsuccessful, Apnex stock will be worth

$ 20$20

per share. Suppose that the morning before the announcement is​ scheduled, Apnex shares are trading for

$ 53$53

per share.

a. Based on the current share​ price, what sort of expectations do investors seem to have about the success of the​ trials?  

b. Suppose hedge fund manager Paul Kliner has hired several prominent research scientists to examine the public data on the drug and make their own assessment of the​ drug's promise. Would​ Kliner's fund be likely to profit by trading the stock in the hours prior to the​ announcement?  

c. Which factors would limit the ability of​ Kliner's fund to profit on its​ information?

a. Based on the current share​ price, what sort of expectations do investors seem to have about the success of the​ trials?  

​ (Select the best choice​ below.)

A.

The market seems to assess a somewhat greater than​ 50% chance of success.

B.

The market seems to have no clue about what will happen to the stock price.

C.

The market seems to believe the trials will not be successful.

D.

The market seems to expect a​ 50% decline in the stock price.

Answer 1

(a): The answer is: The market seems to assess a somewhat greater than 50% chance of success.

Explanation: This is because the current share price is nearer to the price of $68 which is the worth if the trials will be successful. Even if there is a fifty-fifty chance then the worth of the stock will be = (1/2*68) + (1/2*20) = $44. Thus the current price of $53 is greater than this and so we can say that the market seems to assess a somewhat greater than 50% chance of success.

(b): Yes, Kliner’s fund will profit if they have better information than other investors. The use of several prominent research scientists will help Kliner to determine the actual chances of success of new trial and hence Kliner will have better information than other investors.

(c ): The fund’s ability to profit on its information will be limited if the market is illiquid - no one wants to trade if they know Kliner has better information.