Merle Linch,an Up-And-Coming Security Analyst Has Found an Exciting Investment

question 101

Essay

Merle Linch,an up-and-coming security analyst has found an exciting investment strategy based on a correlation between the television programs a firm sponsors and the market performance of its stock.Over the period 1970-1982,he finds that those companies that sponsored football and hockey games did significantly better than the rest of the market,yielding 9.4% a year on average versus 8.4% for the Dow Jones Industrials and 8.5% for the S&P 500 index.He writes up his findings in a market letter for general distribution to his firm's clients.His research is also noticed and publicized by the companies whose stock Linch is recommending on the basis of his "contact sports" theory.
a. How else might you explain what Linch has observed?
b. Precisely how should one test such a theory statistically?
c. What would you expect to find if you did test Linch's theory rigorously? Explain.
d. Suppose the "contact sports" theory is verified. What will happen in markets now that everyone is aware of it? How long should people be able to earn excess profits by buying these stocks?

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