Suppose you are watching a broadcast of the Financial Market Report on CNN with a friend. The host reports that a tropical storm in the Gulf of Mexico has just been upgraded to hurricane status. It is expected to hit the entire gulf coast of the U.S. and destroy most of the sugar beet farms. Your friend then says, "We should buy stock in C&H Sugar because they produce only pure cane sugar from outside the gulf region, and its stock price will surely rise after the storm damages its competitors."
(1) Is it likely that you can make abnormally high returns by using this information to buy stock in C&H Sugar? Why or why not?
(2) Suppose another friend works for the U.S. Weather Bureau. She calls you late at night and in casual conversation, she tells you that weather satellites have detected cloud movements that suggest that an enormous storm is in the process of forming. The weather bureau has not yet reported this information. It is afraid of causing panic because there are no evacuation plans in place. Can you earn abnormally high returns using this information? Why or why not?
(3) What will happen to the price and returns to stock in C&H Sugar as you (and later others) buy stock in C&H Sugar? Can abnormally high returns be maintained? Explain.