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 5.1. What is the abnormal rate of return for Stock E when you consider its systematic risk measure (beta)?
A) 2.0 percent
B) 1.2 percent
C) 4.0 percent
D) -1.05 percent
E) -8.5 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 5.1. What is the abnormal rate of return for Stock E when you consider its systematic risk measure (beta)?
A) 2.0 percent 
B) 1.2 percent 
C) 4.0 percent 
D) -1.05 percent 
E) -8.5 percent

Quizplus · Accepted Answer

The abnormal rate of return is calculated by comparing the actual return to the expected return based on the stock's beta. The expected return is typically calculated using the Capital Asset Pricing Model (CAPM). The difference between the actual return and the expected return gives the abnormal return. In this case, the correct abnormal return is 1.2 percent.