Reference no: EM131982406 , Length:
SECTION A:
On February 19, 2014, company A announced the acquisition of company B for a total of $16 billion. The dividend-adjusted stock prices of Company A on the days around the announcement are listed below in Table 1. The covariance between the return from firm A and the return from S&P500 is 0.0065%, the variance of the return from the S&P500 is 0.0051% and the alpha of company A is 0.3327%.
1. Calculate the beta of firm A.
2. Calculate the abnormal return (AR) for Company A on February 19 2014.
3. Calculate the Cumulative abnormal return (CAR) for company A starting: (i) 3 days before the announcement and considering the 3 days after the announcement: CAR(-3,3); (ii) 1 day before and 1 day after the acquisition CAR(-1,1).
4. Critically discuss your results and the problem of information leakage in event studies.
Table 1
Date Firm A S&P 500
05/03/14 71.57 1873.81
04/03/14 68.80 1873.91
03/03/14 67.41 1845.73
28/02/14 68.46 1859.45
27/02/14 68.94 1854.29
26/02/14 69.26 1845.16
25/02/14 69.85 1845.12
24/02/14 70.78 1847.61
21/02/14 68.59 1836.25
20/02/14 69.63 1839.78
19/02/14 68.06 1828.75
18/02/14 67.30 1840.76
14/02/14 67.09 1838.63
13/02/14 67.33 1829.83
12/02/14 64.45 1819.26
11/02/14 64.85 1819.75
10/02/14 63.55 1799.84
07/02/14 64.32 1797.02
06/02/14 62.16 1773.43
05/02/14 62.19 1751.64
04/02/14 62.75 1755.20
SECTION B:
B1: Define a well-diversified portfolio and illustrate its role in the arbitrage pricing theory.
B2: Demonstrate how the Sharpe ratio and the Treynor measure of performance relate to Jensen's alpha.
B3: Define autocorrelation in stock returns and explain how it can be used to test the efficient market hypothesis.
B4: Explain and briefly discuss the momentum effect.