Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = −0.45 percent and β = 0.5. If the market index subsequently rises by 5 percent while Wal-Mart's stock price rises by 3 percent, what is the abnormal change in Wal-Mart's stock price?
A)−0.45 percent
B)+0.95 percent
C)+0.05 percent
D)+2.50 percent

Question

Quizplus · Accepted Answer

We can use the formula for abnormal return to calculate the answer: 
Abnormal Return = Actual Return - Expected Return 
Expected Return = α + β(Market Return) 
Plugging in the given values, we get: 
Expected Return = -0.45% + 0.5(5%) = 2.55%

Actual Return = 3% 
Abnormal Return = 3% - 2.55% = 0.45%

Therefore, the abnormal change in Wal-Mart's stock price is +0.45%, which is answer choice B.

Analysis of Past Monthly Movements in Wal-Mart's Stock Price Has