Question

Cumulative abnormal returns (CAR) Select one: a. are used in event studies. b. are better measures...

Cumulative abnormal returns (CAR)

Select one:

a. are used in event studies.

b. are better measures of security returns due to economic-wide events than are abnormal returns (AR).

c. are cumulated over the period prior to the firm-specific event.

d. are used in event studies and are better measures of security returns due to economic-wide events than are abnormal returns (AR).

e. are used in event studies and are cumulated over the period prior to the economic-specific event.

Fisher & Paykel has a beta of 2. NZX50 has a return of 2.5% yesterday, and the risk-free rate is currently 0%. You observe that Fisher & Paykel has a return of 5% yesterday. Assuming that markets are efficient, this suggests that

Select one:

a. bad news about Fisher & Paykel was announced.

b. good news about Fisher & Paykel was announced.

c. no news about Fisher & Paykel was announced.

d. none of the options are correct.

Homework Answers

Answer #1

Cumulative abnormal returns are used in event studies and are cumulated over the period prior to the event (economic).

Answer is e) are used in event studies and are cumulated over the period prior to the economic-specific event.

Given Risk free rate = 0%

Market return of NZX 50 = 2.5%

Beta = 2

Required rate of return = Risk free rate + Beta * MRP = 0% + 2* 2.5% = 5%

As the markets are efficient , and the actual returns also turned out to be 5%

Answer is

c. no news about Fisher & Paykel was announced.

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