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 $ 69 per share. If the trials are ​unsuccessful, Apnex stock will be worth $ 16 per share. Suppose that the morning before the announcement is​ scheduled, Apnex shares are trading for $ 51 per share.

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

choices:

1) the market seems to expect a 50% decline in the stock price

2) the market seems to asses a somewhat greater than 50% chance of success

3) the market seems to believe the trials will not be successful

4) the market seems to have no clue about what will happen to the stock price

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? 

choices:

1)  profit, since the data on the drug is public

2)   lose​ money, since nobody can predict what the stock market is going to do.

3) profit, if they have better information than other investors.

4) do​ nothing, since that would be insider trading.

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

choices:

1) he market may be illiquid - no one wants to trade if they know Kliner has better information

2) Kliner might not have enough money to profit with this trade

3) since the information on the drug is public, everybody knows what Kliner knows

4) the stock price may be low prior to the announcement

Answer 1

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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 $ 69 per share. If the trials are ​unsuccessful, Apnex stock will be worth $ 16 per share. Suppose that the morning before the announcement is​ scheduled, Apnex shares are trading for $ 51 per share.

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

Ans- The market seems to assess a large (>50%) chance of success.

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?

Ans- Yes (in expectation), since they likely have better information than other investors.

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

Ans- The market may be illiquid: if everyone knows that Kliner’s fund has better information, no one will want to trade with him. Also, if Apnex’s market cap is small, in order to create large profits, Kliner’s fund will have to trade a large fraction of Apnex’s stock, so Kliner’s trades will move prices significantly, limiting profits.