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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

A stock has an expected return of 12% under CAPM. A portfolio manager buys it ahead of a results announcement, and the stock's actual return over the announcement period is 15%. The market's return in the same period gave the stock an expected return of 12%, and there was no other news. In an event study, what is the abnormal return?

The abnormal return is 3%. In an event study, abnormal return equals actual return minus the return expected from the model, so 15% less 12% gives 3%, the part of the return attributable to the announcement.

  1. A3%Correct
  2. B12%
  3. C15%
  4. D27%

Explanation

Abnormal return = actual return - expected return = 15% - 12% = 3%. Adding the returns (27%) is a sign error, and using 15% or 12% alone ignores the benchmark adjustment.

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