Question
Matt's Widget Co. is suing Elon Mining Co. Today, the jury announced the outcome of the trial. There was also important news about the economy:
Matt's Widget Co. is suing Elon Mining Co. Today, the jury announced the outcome of the trial. There was also important news about the economy: we learned the GDP growth rate was 2.7%, instead of the expected 2.0%. You know that Matt's Widget Co. has a CAPM beta of 1.1, the market return today was 4.4%, and the daily risk-free rate is 0.5%. There was no other news today and Matt's Widget Co. had a stock return of 2% today.
By how much did the jury announcement change Matt's stock return today? Hint: this question asks you to use an event study. Calculate the expected return today (assuming no firm-specific news) using the CAPM. Then compare the actual return to the CAPM expected return: the difference is due to the lawsuit announcement. Enter your answer in % form without the % symbol (i.e., if your answer is 3.5%, type 3.5).
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