Reading Assignment Class 3 1. Event Study: An Example Delta, United, and American Airlines announced purchases of planes on July 18 (7/18), February 12 (2/12), and October 7 (10/7), respectively. Given the following information, calculate the cumulative abnormal return (CAR) for these stocks as a group. Graph the result and provide an explanation. All of the stocks have a beta of 1 , and no other announcements are made. 2. Discuss the following questions: 1. A successful firm like Microsoft has consistently generated large profits for years. Is this a violation of the EMH ? 2. A successful investor has consistently beaten the market for three years. Is this a violation of the EMH? 3. Why are the following "effects" considered efficient market anomalies? Are there rational explanations for any of these effects? a. P/E effect. b. Book-to-market effect. c. Momentum effect. d. Small-firm effect. 4. Respond to each of the following comments. a. If stock prices follow a random walk, then capital markets are little different from a casino. b. A good part of a company's future prospects are predictable. Given this fact, stock prices can't possibly follow a random walk. c. If markets are efficient, you might as well select your portfolio by throwing darts at the stock listings in The Wall Street Journal