Reading 12- LOS k: Q1 companies, different, class, five, expected

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1.Mary Steen estimated that if she purchased shares of companies who announced restructuring plans at the announcement and held them for five days, she would earn returns in excess of those expected from the market model of 0.9 percent. These returns are statistically significantly different from zero. The model was estimated without transactions costs, and in reality these would approximate 1 percent if the strategy were effected. This is an example of:
A)    statistical and economic significance.
B)    a market inefficiency.
C)    an arbitrage opportunity.
D)    statistical significance, but not economic significance.

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the abnormal returns are note sufficient to cover transaction costs,so there is no economic significance to this trading strategy.

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1.Mary Steen estimated that if she purchased shares of companies who announced restructuring plans at the announcement and held them for five days, she would earn returns in excess of those expected from the market model of 0.9 percent. These returns are statistically significantly different from zero. The model was estimated without transactions costs, and in reality these would approximate 1 percent if the strategy were effected. This is an example of:
A)    statistical and economic significance.
B)    a market inefficiency.
C)    an arbitrage opportunity.
D)    statistical significance, but not economic significance.
The correct answer was D)
The abnormal returns are not sufficient to cover transactions costs, so there is no economic significance to this trading strategy. This is not an example of market inefficiency or an arbitrage opportunity because excess returns are not available after covering transactions costs.