Question

Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk):

Stock	Rit		Rmt
B	12.4	%	4.7	%
F	10.3		7.6
T	15.6		7.5
C	12.9		15.8
E	16.6		11.0

Rit = return for stock i during period t
Rmt = return for the aggregate market during period t

Use a minus sign to enter negative values, if any. Round your answers to one decimal place.

ARBt:   %

ARFt:   %

ARTt:   %

ARCt:   %

AREt:   %

Answer 1

Given the following information,

Stock	Rit	Rmt
B	12.4	4.7
F	10.3	7.6
T	15.6	7.5
C	12.9	15.8
E	16.6	11.0

In order to calculate the abnormal rates of return, we need to use the following formula,

ARit = Rit - Rmt

where,

ARit = abnormal rate of return for the stock i during period t

Rit = return for the stock i during period t

Rmt = return for the aggregate market during period t

Sustituting the above given data in the formula, we get

Stock B:

In this case

i = B

ARBt = RBt - RBt

ARBt = 12.4 - 4.7

ARBt = 7.7

Stock F:

In this case

i = F

ARFt = RFt - RFt

ARFt = 10.3 - 7.6

ARFt = 2.7

Stock T:

In this case

i = T

ARTt = RTt - RTt

ARTt = 15.6 - 7.5

ARTt = 8.1

Stock C:

In this case

i = C

ARCt = RCt - RCt

ARCt = 12.9 - 15.8

ARCt = -2.9

Stock E:

In this case

i = E

AREt = REt - REt

AREt = 16.6- 11.0

AREt = 5.6

Therefore,

ARBt	7.7
ARFt	2.7
ARTt	8.1
ARCt	-2.9
AREt	5.6