Question

PBYI’s current BID-ASK is $59.00 - $60.00. PBYI is going to release their annual report tomorrow; you have special skill in valuing biotech companies, and you believe that PBYI has an expected alpha tomorrow of 2% compared to the market’s current best estimate of fair value. Is the following statement true? PBYI is currently overpriced. True False 1 points QUESTION 8 If you purchased PBYI now then sold it tomorrow right before market close, what is your best estimate for your expected profit after taking transactions cost into account? (in %, rounded to 1 decimal place)

Answer 1

PBYI is not over priced

expected profit = $0.18

Step-by-step explanation:

BID - ASK price : 59.00 - 60.00

expected alpha = 2%

In this scenerio ( positive alpha ) you can buy the PBYI at $60.00

when you buy at $60 the value will increase to ; 60 + ( 2% * 60 ) = $61.2

when you resell the security ( PBYI ) you will get ; ( 61.2 )* (59/60) = $60.18

therefore your expected profit = 60.18 - 60 = $0.18

PBYI is not not currently Overpriced since you can buy and make profit after selling the next day