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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

In an event study of a bonus announcement by Sunrise Textiles, the actual returns and the market-model expected returns over a three-day window are: Day -1 actual 1.5%, expected 1.0%; Day 0 actual 6.0%, expected 1.2%; Day +1 actual 1.4%, expected 1.1%. What is the cumulative abnormal return (CAR) over the window?

The cumulative abnormal return is 5.6%. Daily abnormal returns are actual minus expected: 0.5%, 4.8% and 0.3%. Adding them gives 5.6%. Using only the event day or summing actual returns ignores the window or the expected return adjustment.

  1. A5.6%Correct
  2. B4.8%
  3. C8.9%
  4. D0.5%

Explanation

Abnormal returns: Day -1 = 0.5%; Day 0 = 4.8%; Day +1 = 0.3%. CAR = 0.5 + 4.8 + 0.3 = 5.6%. The 4.8% option counts only the event day, and 8.9% sums actual returns (1.5+6.0+1.4) without deducting expected returns.

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