You consider buying a share at a price of $25. The share is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the share in one year for $28. The share's beta is 1.1, rf is 6% and E[rm] = 16%. What is the share's abnormal return?
A)1%
B)2%
C)-1%
D)-2%

Question

Quizplus · Accepted Answer

The expected return is calculated as (1.50 + (28 - 25)) / 25 = 18%. The required return using CAPM is 6% + 1.1*(16% - 6%) = 17%. The abnormal return is 18% - 17% = 1%.

You Consider Buying a Share at a Price of $25