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



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


Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the difference in each case.

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