Exhibit 5-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
\mathrm{Z} & 9.8 & 8.0 & 0 & 1.1
\end{array}$
R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5-5. What is the abnormal rate of return for Stock Z when you consider its systematic risk measure (beta)?
A) 0.1%
B) 1.0%
C) 0.5%
D) -1.0%
E) -2.0%

Question

Exhibit 5-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}
\text { Stock } & \mathrm{R}_{\text {it }} & \mathrm{R}_{\text {mt }} & \mathrm{a}_{\mathrm{i}} & \text { Beta } \
\hline \mathrm{A} & 10.6 & 15 & 0 & 0.8 \
\mathrm{Z} & 9.8 & 8.0 & 0 & 1.1
\end{array}$ 
R it = return for stock i during period t
R mt = return for the aggregate market during period t
-Refer to Exhibit 5-5. What is the abnormal rate of return for Stock Z when you consider its systematic risk measure (beta)?
A) 0.1%
B) 1.0%
C) 0.5%
D) -1.0%
E) -2.0%

Quizplus · Accepted Answer

The abnormal rate of return, also known as alpha ($a_i$), measures the difference between the actual return of the stock and the expected return based on its beta. The expected return based on the Capital Asset Pricing Model (CAPM) is calculated as: $$ \text{Expected return} = R_f + \beta_i (R_m - R_f) $$ However, without the risk-free rate ($R_f$) provided, we can infer the abnormal return through another method. Given that Stock Z's actual return ($R_{it}$) is 9.8% and its beta is 1.1, we can compare this to the market return ($R_{mt}$) of 8.0%. If Stock Z had performed exactly as predicted by its beta, its return would have been 1.1 times the market's excess return over the risk-free rate. Since we don't have the risk-free rate, we directly look at the given information for abnormal return, which is already provided as $a_i = 0$, indicating there should be no abnormal return. However, the question specifically asks for the abnormal return considering its systematic risk (beta), which seems to imply a calculation error in the premise since the provided data does not directly support the calculation of abnormal return without additional assumptions.Given the data and typical interpretation, there seems to be a misunderstanding in the question's framing, as the abnormal return (alpha) is directly provided as 0 for both stocks, which contradicts the need to calculate it based on beta and the returns provided. However, if we were to calculate the expected return based on beta and compare it to the actual return to find the abnormal return, we would need the market's risk-free rate, which is not provided.The correct answer choice, based on the information provided and typical financial analysis, should reflect that there's no direct way to calculate the abnormal return from the given data without additional information such as the risk-free rate. However, since the question seems to seek an answer based on the provided choices and considering systematic risk, there might be an expectation for a calculation or an inference that isn't directly supported by the given data.Given the confusion and the lack of direct calculation method from the provided data, the response to the question as framed might be based on an expected understanding or a specific calculation not directly supported by the given information.

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

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