Calculating and interpreting abnormal returns:
In a closely contested lawsuit, Apex sued Bpex for patent infringement. On the day of the decision was announced, the rates of return on the two companies was rA = 1.6% and rB = 1.5%, while the market return was rM = 1.5%. The market responded to good news about the unemployment rate.
You have estimated the following index models for the relationship between stock returns and market returns for these two stocks:
rA - rf = 1.2(rM - rf) + eA
rB - rf = 0.8(rM - rf) + eB
a. Assuming that over a one day period the risk free rate is equal to zero, what are the abnormal returns for the two stocks?
b. Based on these abnormal returns, which company most likely won the lawsuit?