Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lcccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 9.0 & 7.0 & 0 & 1.1
\end{array}$
R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5-2. What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure (beta)?
A) 2.4%
B) 1.5%
C) -1.5%
D) 2.0%
E) -3.2%

Question

Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{lcccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \text { ABC } & 11.5 & 13.0 & 0 & 0.7 \
\text { XYZ } & 9.0 & 7.0 & 0 & 1.1
\end{array}$ 
R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5-2. What is the abnormal rate of return for Stock ABC when you consider its systematic risk measure (beta)?
A) 2.4%
B) 1.5%
C) -1.5%
D) 2.0%
E) -3.2%

Quizplus · Accepted Answer

The abnormal rate of return is the difference between the actual return and the expected return. The expected return is calculated using the Capital Asset Pricing Model (CAPM), which is:Expected return = Risk-free rate + Beta * (Market return - Risk-free rate)In this case, the risk-free rate is not given, so we will assume it is 0%. The market return is 13.0%. The beta for Stock ABC is 0.7. Plugging these values into the CAPM formula, we get:Expected return = 0% + 0.7 * (13.0% - 0%) = 9.1%The actual return for Stock ABC is 11.5%. Therefore, the abnormal rate of return is:Abnormal return = Actual return - Expected return = 11.5% - 9.1% = 2.4%

Exhibit 5-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 5-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)