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

Question

Quizplus · Accepted Answer

E[r] = 11eaaae8_8b65_5618_a4b8_3bed9e7cac33_TB6474_11 (100%) = 18%
Required return = 6% + 1.1(16% - 6%) = 17%
Abnormal return = 18% - 17% = 1%

You Consider Buying a Share of Stock at a Price