Computing abnormal rates of return
Question 1
Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):
Stock Rit Rmt
B 11.5% 4.0%
F 10.0 8.5
T 14.0 9.6
C 12.0 15.3
E 15.9 12.4
Rit = Return for stock i during period t
Rmt = Return for the aggregate market during period t
QUESTION 2
Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following systematic risk measures (betas):
STOCKS βi
B 0.95
F 1.25
T 1.45
C 0.70
E -0.30
QUESTION 3
Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the difference in each case.
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