How Tests Are Structured (cont.) ■ Returns are adjusted to determine if they are abnorma/by taking into account what the rest of the market did that day. The Abnorma/Return on a given stock for a particular day can be calculated by subtracting the market's return on the same day (RM)from the actual return (R)on the stock for that day: AR=R-RM The abnormal return can be calculated using the Market Model approach: AR=R-(a+BRM 2323 How Tests Are Structured (cont.) How Tests Are Structured (cont.) ƒ Returns are adjusted to determine if they are abnormal by taking into account what the rest of the market did that day. ƒ The Abnormal Return on a given stock for a particular day can be calculated by subtracting the market’s return on the same day ( RM) from the actual return (R) on the stock for that day: AR= R – RM ƒ The abnormal return can be calculated using the Market Model approach: AR= R – ( α + β RM)