The sim assumes that this residual return on a stock

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Unformatted text preview: ent, and responds to information accurately and quickly, then during the period, the cumulative average residuals (CARs) are expected to: Stay close to 0 prior to earnings announcement day Jump up (down) sharply for the better (worse) than expected earnings group on day 0 Stay close to the level attained on announcement day on days after the earnings announcement day Through event studies from Jones, Rendleman and Latane (1984) on efficient market hypothesis: Pre-announcement drift – upwards for the good news groups a few days prior to the announcement day – this is not an anomaly, but in response to leaked information that is not confirmed. Announcement day – Jump upwards for the good news groups – sharp response is consistent with semi-strong form efficient market hypothesis Post-announcement drift – continue to drift upwards for the good news group. This is considered an anomaly as it indicates that: o The market has not responded to the news content of earnings announcements accurately o Investors who form a portfolio of stock with better expected earnings could earn abnormal returns even after the announcements have been made to the public 6 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 O THER ANOMALIES AT THE SEMI-STRONG FORM LEVEL USING RATIOS BASU (1983) P/E RATIO EFFECT Basu sorted a sample of stocks into 5 size categories and within each size category, 5 more groups of stocks were classified according to small P/E ratios. Results show that portfolios containing stocks with small P/E ratio have: Higher returns than portfolio’s of large P/E ratio stocks Positive abnormal returns as measured by the portfolio’s Jensen alphas (average return – expected return) This shows that the P/E ratio is an anomaly to the semi-strong form efficient market hypothesis as the P/E ratio is a readily available piece of information. Small firm effects put forward by Arbel and Stebel (1983): Small firms have less attention, less liquidity and more firm specific risks, in which investors will demand higher risk premiums not incorporated by the CAPM. Due to the higher required rate o...
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This document was uploaded on 03/21/2014.

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