Reference no: EM132696397

Adam is a surgeon and suffers from an overconfidence bias. He likes to gamble on the stock market and is a big believer in his own predictions. In fact, he is poorly informed, like most investors. A rumor has it that Signe Vito (a start-up that makes labels for the medical industry) will be the subject of a buyout offer at $ 20 per share. If the redemption does not take place, the share price will be $ 15. This uncertainty will be resolved in the coming hours. Adam is confident the buyback will take place and has instructed his broker to buy the stock at any price as long as it stays below $ 20. In fact, the real probability of the buy-out happening is 50%, but a handful of people are informed and know whether or not the buy-back will take place. They also placed orders. No one else is buying this stock.

a) Describe the evolution of the market price after these orders have been placed if the buyback takes place in a few hours. How will Adam benefit: positive, negative, or zero?

b) What price range could be observed once these orders have been placed if the redemption does not ultimately take place? How will Adam benefit: positive, negative, or zero?

c) What is Adam's expected profit?