Ace. Pharmaceutical announced FDA approval for a new drug on December 3. West Drug Co. announced approval for its new drug on December 5. No other information was released that would affect returns over the period. What is the combined cumulative abnormal return for the five-day period commencing two days prior to the approval announcement date? Use the following data to answer this question. No trading occurred on December 6 and 7.
$\begin{array}{rrrr}
\text { Date}& \text {Market}& \text { Ace Return }& \text {West Returr }\
1 \text {-Dec } & .30\% & .10\% & .10\% \
2 \text {-Dec } & .20\% & .20\% & -.20\% \
3 \text {-Dec } & .10\% & .70\% & .30\% \
4 \text {-Dec } & .00\% & .50\% & .20\% \
5 \text {-Dec } & -.10\%& -.40\%& .40\% \
8 \text {-Dec } & .10\% & -.30\% & -.10\% \
9\text { -Dec } & -.20\% & -.10\% & -.20\%
\end{array}$

Question

Quizplus · Accepted Answer

The cumulative abnormal return (CAR) is calculated by summing the daily abnormal returns (AR) for each stock over the specified period. AR is the stock return minus the market return. For Ace: AR = (0.10% - 0.30%) + (0.20% - 0.20%) + (0.70% - 0.10%) + (0.50% - 0.00%) + (-0.40% - (-0.10%)) = -0.20% + 0.00% + 0.60% + 0.50% - 0.30% = 0.60%. For West: AR = (0.10% - 0.30%) + (-0.20% - 0.20%) + (0.30% - 0.10%) + (0.20% - 0.00%) + (0.40% - (-0.10%)) = -0.20% - 0.40% + 0.20% + 0.20% + 0.50% = 0.70%. Combined CAR = 0.60% + 0.70% = 1.3%.

Ace Pharmaceutical Announced FDA Approval for a New Drug on December