Case Study.

Dear Student, please read carefully and explain what has happened? Indicate the possible
outlines from this case. Is the case regarding external or internal errors? Prepare an
explanation.
August 17 – the steepest among its main supermarket rivals. One top 25 shareholder in
Tesco said: “We all know that Tesco has got its strategy wrong in many ways, so I
don’t think this is a big shock. But clearly this is a company and new chief executive that
has a lot to do. There is a lot of uncertainty.” Another top 10 investor said: “It is always
difficult to call, but this may be the bottom for Tesco when we look back in a year or so. I
cannot see Aldi and Lidl continuing to grow as they have been and that has been the
problem for Tesco.” Jaime Vázquez, analyst at JPMorgan, said the profit warning was
unlikely to mark the start of a positive cycle for Tesco, however. “In our view, there is
more potential bad news to come: further price cuts, ongoing weak trading, property
write downs, potential cash injections into the pension fund [and] a possible credit
downgrade.” The profits warning knocked 7 per cent off Tesco’s shares, bringing the
total fall this year to 38 per cent. Tesco shares closed 16.35p lower at 229.95p.

Weak Form

Semi-Strong
Form

Strong Form

1. Please explain the main insight

from the figure by shown below, discuss the plausibility of this result. Prepare an
example, related to Finance for each circle
2. Mr. Park holds 150 shares of a construction company that currently trade at $24.30 per
share. His group mate, who is an employee in the company, informs him that the stock
price will decline over the next days because the company has failed in a project in Dubai
and will announce about this after publishing the Annual Financial Report. Mr.Park does
not believe his friend and holds all his shares. A week later, the construction company
surprisingly for everyone announces the failure of Dubai deal, without waiting for
Annual Report to be published and the stock price starts declining sharply, dropping to
$15.12 in a couple of days. Was the market efficient or no? Please justify Your answer,
using the calculations. Give the detailed explanation of EMH Theory.
3. Mr.Park's utility function is u(w) = w^1/2, or the square root of health in dollars. He is
considering two prospects P1(.50, $10,000, $160,000) and P2(.01, $1,000,000, 0). Which
one would she choose if she maximizes expected utility? Arbitrageurs expectations are
“correct;” noise traders expectations are “biased”. Are You familiar with this citate?
Justify Your answer.
4. Suppose that you have initial wealth equal to $25. You receive a letter that states that you
have won $16 ina lottery. However, the next day you receive a call from the lottery
organizers. They tell you that it was a mistake so that in fact you did not win anything.
Suppose further that you got the lottery ticket for free and that you consider the impact of
wealth changes on your utility sequentially. How did your utility change as a result of
these events according to
(A) Expected utility
(B) Prospect utility