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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Shares of Kaveri Ltd are priced at ₹200 before an announcement. In an efficient semi-strong market, the announcement of an unexpected bonus in earnings raises the fair value to ₹220. The share's beta is 1, the market return on the announcement day is 1%, and the expected return on the share on that day is 1%. The share actually rises by 11% on that day. What is the abnormal return on the day?

The abnormal return is 10%. The actual return of 11% less the expected return of 1% given by the beta of 1 and the market return of 1% leaves 10%, the part attributable to the announcement.

  1. A11%
  2. B10%Correct
  3. C12%
  4. D1%

Explanation

Actual return = (220-200)/200 = 10%, but the data says the share rose 11%, so use the stated figure: abnormal return = actual 11% - expected 1% = 10%. Subtracting nothing would give 11%, which ignores the normal return expected from market movement.

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