Winter 2011 Assignment 2 solutions Rev

Winter 2011 Assignment 2 solutions Rev - AP/ADMS 3531,...

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AP/ADMS 3531, Winter 2011 Solutions to homework assignment #2 1. (20 points) Analyze the behaviour of Potash Corporation of Saskatchewan’s stock returns during the two-week period last year (2010) from Monday August 9 through Friday August 20, following the approach in the textbook on pages 241-242. Using historical share prices for this stock’s trading on the TSX, compute the rate of return for each day during the period. Using the S&P/TSX Composite Index, compute the abnormal return for each day. Draw a graph of the cumulative abnormal returns for the two-week period. Which day had the largest abnormal return? Write a brief (one sentence) explanation of why the stock rose that day. Explain why this is approximately, but not exactly, consistent with the semistrong form of market efficiency. Also explain whether this is consistent with the strong form of market efficiency. Google Finance and Yahoo Finance are good sources for the price data you will need. The ticker symbol for the S&P/TSX Composite Index is GSPTSE. Google’s syntax for index quotes is to put a dot in front of the symbol (.GSPTSE) and Yahoo uses a ^ for index quotes (^GSPTSE). Before the assignment due date, an announcement asked students to use Yahoo Finance to obtain the price quotes for Potash Corp. Yahoo was reporting the prices as they appeared in August 2010, while Google had changed the historical prices to reflect a subsequent 3-for-1 stock split. The announcement also noted that daily returns are calculated “close to close” using the closing price for that particular day along with the closing price from the previous trading day. Cumulative POT POT GSPTSE GSPTSE abnormal Abnormal Date price return price return return Return 8/6/2010 116.58 11799.97 8/9/2010 116.49 -0.0008 11863.56 0.0054 -0.0062 -0.0062 8/10/2010 115.44 -0.0090 11838.29 -0.0021 -0.0069 -0.0130 8/11/2010 113.09 -0.0204 11582.21 -0.0216 0.0013 -0.0118 8/12/2010 116.55 0.0306 11523.60 -0.0051 0.0357 0.0239 8/13/2010 116.01 -0.0046 11528.25 0.0004 -0.0050 0.0188 8/16/2010 117.23 0.0105 11552.76 0.0021 0.0084 0.0272 8/17/2010 147.34 0.2568 11728.64 0.0152 0.2416 0.2689 8/18/2010 151.75 0.0299 11781.08 0.0045 0.0255 0.2943 8/19/2010 154.86 0.0205 11710.18 -0.0060 0.0265 0.3208 8/20/2010 157.06 0.0142 11722.07 0.0010 0.0132 0.3340 The POT return for August 9 is calculated as (116.49-116.58)/116.58. Similar calculations are used for the other days. The abnormal returns are calculated as the POT return minus the GSPTSE return. Cumulative Abnormal Returns are calculated by summing the abnormal
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returns. Show graph of the cumulative abnormal returns. Could be in the style of Figure 8.5, although it is better to connect the dots. The largest abnormal return is 24.16% on Tuesday August 17. POT rose by about $30 that day
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This note was uploaded on 05/01/2011 for the course ADMS 3531 taught by Professor Profp during the Winter '10 term at York University.

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Winter 2011 Assignment 2 solutions Rev - AP/ADMS 3531,...

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