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.