USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot when you consider its systematic risk measure (beta)?
A) -2.10 percent
B) -2.00 percent
C) 5.20 percent
D) 14.10 percent
E) 3.00 percent

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot when you consider its systematic risk measure (beta)?
A) -2.10 percent 
B) -2.00 percent 
C) 5.20 percent 
D) 14.10 percent 
E) 3.00 percent

Quizplus · Accepted Answer

The abnormal rate of return is the difference between the expected return and the actual return. The expected return is calculated using the Capital Asset Pricing Model (CAPM), which takes into account the systematic risk of the asset. The systematic risk of an asset is measured by its beta, which is a measure of how much the asset's return moves in relation to the market.Elliot's beta is 1.2, which means that its return is expected to move 1.2 times as much as the market. The expected return for Elliot is therefore 10% + 1.2 * (12% - 10%) = 12.4%. The actual return for Elliot is 10%, so the abnormal rate of return is 12.4% - 10% = -2.4%.