Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: a = -0.45 percent and b = 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

Using the given estimates, we can estimate Wal-Mart's expected return based on the market's return:

Expected return = a + b * market return
Expected return = -0.45 + 0.5 * 5
Expected return = 1.55%

Therefore, if the market rises by 5%, we would expect Wal-Mart's stock price to rise by 1.55%. However, the actual increase was 3%, so we have an abnormal change of:

Abnormal change = actual change - expected change
Abnormal change = 3% - 1.55%
Abnormal change = 1.45%

So the correct answer is B) +0.95 percent, as this is the abnormal change in Wal-Mart's stock price above what we would expect based on the market's movement.

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