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RIT Case Brief – PD1

Build 1.00

Price Discovery 1
Phil’s Tanning Salons (PTS) has just undergone an IPO and was priced at $20.00 per share. Your
firm did not subscribe to purchase shares in the IPO and would rather wait until your analysts have
spent some time analyzing the company to decide whether or not you believe it is mispriced.

Your portfolio team has three analysts and all three of them have decided to independently value
PTS. You’re aware that other portfolio management firms are undergoing a very similar process.

While each analyst is determining their own valuation, it is apparent that each analyst will
independently conclude that the stock is worth $10, $20, or $30. The analysts are required to
provide their estimates to you this week, and you expect them to come in at the beginning, middle,
and end of the week.

We assume that the price of PTS will ultimately settle at the mode price of all analysts. That is, if
there are two firms, and three analysts at each firm, the final value will be the most common result
of the six analysts1.

As a hedge fund manager, it is your responsibility to evaluate your analysts’ views, aggregated with
information inferred from the market prices, in an attempt to determine the fair value for PTS.
Armed with this forecast, you should go long or short sell the stock to generate a profit.

Price Discovery Simulation #1 – PD1

This trading simulation represents the first week of trading for Phil’s Tanning Salons (PTS). The
trading will take place over a 6 minute period, and you will receive your private estimates from
your company’s analysts after 1, 120, and 240 seconds (out of a 360 second case).

You are to use this information, plus information gleaned from the market prices that you observe
(which will aggregate information from all traders using their own company’s analysts’ opinions),
to forecast the mode of all the analysts’ views. The final stock price will settle at this value.

1 In this simulation, there will be n*3 analysts, where n is the number of students participating. i.e. if there are 30
students, there will be a total of 90 analysts, and the final value will be the mode of the 90 analysts.

Kevin Mak* and Tom McCurdy** prepared this case for the RIT market simulation platform, http://rit.rotman.utoronto.ca/.
*Manager of the Financial Research and Trading Lab, Rotman School of Management;
**Professor of Finance and Founding Director of the FRTL, Rotman School of Management, University of Toronto.

Copyright © 2014, Rotman School of Management. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the permission of Rotman School of Management.
Computerized liquidity traders (labeled ANON) will be present in the market, but will have a very
small effect on the market price.

You will be able to buy or short sell up to 100,000 shares of PTS, and there are no trading costs
associated with the orders.

Copyright © 2014, Rotman School of Management. 2

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