HW chp 6 week 2 FIN 550

1.

Compute the abnormal rates of return for the following stocks during period

t

(ignore dif-

ferential systematic risk):

Stock

R

it

R

mt

B

11.5% 4.0%

F

10.0 8.5

T

14.0 9.6

C

12.0 15.3

E

15.9 12.4

R

it

=

return for stock 

i

 during period 

t

R

mt

=

return for the aggregate market during period 

t

2.

Compute the abnormal rates of return for the five stocks in Problem 1 assuming the fol-

lowing systematic risk measures (betas):

Stock

β

i

B

0.95

F

1.25

T

1.45

C

0.70

E

−

0.30

3.

Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the differ-

ence in each case.

Chapter 6:

Efficient Capital Markets

179