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

Question

Quizplus · Accepted Answer

Using the formula for abnormal returns:

Abnormal return = Actual return - (Expected return)
Expected return = α + β(Market return)

Plugging in the given values:

Expected return = -0.45% + 0.5(5%) = 2.55%

Actual return = 3%

Abnormal return = 3% - 2.55% = 0.45%

So the abnormal change in Wal-Mart's stock price is +0.45%, which is closest to option B (+0.95%).

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