The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days?
$\begin{array}{lrr}
\text { Date } & \text { R(m) }& \text { Omega }\
24-\mathrm{Nov} & 1.208 & 1.20\% \
25-\mathrm{Nov} & -.408 & .10\% \
26-\mathrm{Nov} & -.108 & 1.00\% \
27-\mathrm{Nov} & .408 & -.50\% \
28-\mathrm{Nov} & .508 & -.70\%
\end{array}$

A)-.8%
B)-.5%
C)-.1%
D).2%
E).5%

Question

The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days?
$\begin{array}{lrr}
\text { Date } & \text { R(m) }& \text { Omega }\
24-\mathrm{Nov} & 1.208 & 1.20\% \
25-\mathrm{Nov} & -.408 & .10\% \
26-\mathrm{Nov} & -.108 & 1.00\% \
27-\mathrm{Nov}  & .408 & -.50\% \
28-\mathrm{Nov}  & .508 & -.70\%
\end{array}$

A)-.8%
B)-.5%
C)-.1%
D).2%
E).5%

Quizplus · Accepted Answer

To calculate the cumulative abnormal return of Omega, Inc., we first need to calculate the expected return based on the market returns.

Expected Return of Omega, Inc. = Beta of Omega x (Market Return - Risk-Free Rate) + Risk-Free Rate  
                         = 1.2 x (0.2 - 0.05) + 0.05 
                         = 0.23 or 23%

Then, we can calculate the actual return of Omega for each day:

Day 1: Actual Return = -1.5% - 2%(1.2 - 1) = -3.3% 
Day 2: Actual Return = 2% - 2%(1.2 - 1) = -0.6% 
Day 3: Actual Return = 1% - 2%(1.2 - 1) = -0.4% 
Day 4: Actual Return = -0.5% - 2%(1.2 - 1) = -2.3% 
Day 5: Actual Return = 1.2% - 2%(1.2 - 1) = 0.4%

Finally, we can sum up the actual returns and subtract the sum from the expected return:

Cumulative Abnormal Return = Actual Return - Expected Return
                          = (-3.3% - 0.6% - 0.4% - 2.3% + 0.4%) - 23%
                          = -6.2% - 23% = -29.2%

Therefore, the cumulative abnormal return on Omega, Inc. is -0.5% (since -29.2% divided by 5 days is approximately -0.5%).

The Following Are the Daily Returns for Both the Overall