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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

In an event study, a stock has an expected return of 1.5% each day. Its actual daily returns on days -1, 0 and +1 around a bonus announcement were 1.0%, 6.5% and 2.0% respectively. Ignoring compounding, what is the cumulative abnormal return over the three days, and what does an immediate full price adjustment on day 0 with no further drift imply for day +1?

The cumulative abnormal return is 5.0%. Daily abnormal returns are -0.5%, 5.0% and 0.5% after subtracting the 1.5% expected return. Under semi-strong efficiency, adjustment completes on the announcement day, so day +1 should show roughly zero abnormal return; the 0.5% is minor drift.

  1. ACAR is 5.0%; day +1 abnormal return should be about zero, so the 0.5% is mild driftCorrect
  2. BCAR is 9.5%; day +1 abnormal return should be positive
  3. CCAR is 5.0%; day +1 abnormal return should be 2.0%
  4. DCAR is 0.5%; day +1 abnormal return should be negative

Explanation

Abnormal returns: day -1 = 1.0-1.5 = -0.5%; day 0 = 6.5-1.5 = 5.0%; day +1 = 2.0-1.5 = 0.5%. Sum = 5.0%. In an efficient market, adjustment is complete on the announcement day, so day +1 should be about zero; the 0.5% is small drift. Option 9.5% sums actual returns only.

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