The following are the daily returns for both the overall market and for Dexter Inc.What is the cumulative abnormal return on Dexter,Inc.,stock for these 5 days?
A)-0.7 percent
B)-0.3 percent
C)-0.2 percent
D)0.3 percent
E)0.6 percent

Question

The following are the daily returns for both the overall market and for Dexter Inc.What is the cumulative abnormal return on Dexter,Inc.,stock for these 5 days? 
A)-0.7 percent 
B)-0.3 percent 
C)-0.2 percent 
D)0.3 percent 
E)0.6 percent

Quizplus · Accepted Answer

To calculate the cumulative abnormal return, we need to first calculate the expected return for Dexter, Inc. using the market return and the beta value for Dexter, Inc.

Beta value of Dexter, Inc. = 1.5
Market return for 5 days = (-0.5 + 2.0 + 1.5 + 0.4 + 1.2) / 5 = 0.52%
Expected return for Dexter, Inc. = 0.5% + 1.5 x 0.52% = 1.28%

Actual return for Dexter, Inc. = (-0.8 + 1.1 + 0.7 - 0.3 + 0.2) / 5 = 0.18%

Cumulative abnormal return = Actual return - Expected return
= 0.18% - 1.28% = -1.10%

Therefore, the cumulative abnormal return on Dexter, Inc. stock for these 5 days is -1.10%, which is closest to choice A (-0.7%).

The Following Are the Daily Returns for Both the Overall