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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

In an event study of 4 days around a rights issue announcement, a stock's daily abnormal returns are +1.0%, +2.5%, -0.5% and +0.5%. What is the cumulative abnormal return (CAR) and the average abnormal return (AAR) per day?

The cumulative abnormal return is 3.5%, the sum of the four daily abnormal returns including the negative one, and the average per day is 3.5 divided by 4, which equals 0.875%. Treating the negative return as positive would wrongly overstate the figures.

  1. ACAR 3.5%, AAR 0.875%Correct
  2. BCAR 4.5%, AAR 1.125%
  3. CCAR 3.5%, AAR 1.75%
  4. DCAR 2.5%, AAR 0.625%

Explanation

CAR = 1.0 + 2.5 - 0.5 + 0.5 = 3.5%. AAR = 3.5/4 = 0.875%. Ignoring the negative sign gives 4.5% and 1.125%. Dividing by 2 gives 1.75%.

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