Compute the abnormal rates of return (Graded A+) - use as a guide only - 22806

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

Stock                 Rit                      Rmt

B                        11.5%                  4.0%

F                         10.0%                    8.5%

T                         14.0%                    15.3%

C                         12.0                        12.4

Rit= return for stock I during period t

Rmt= return for the aggregate market during period t

2. Compute the abnormal rates of return for the fives stocks in problem 1 assuming the following systematic risk measures (betas):

Stock                                    Bi

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 difference in each case.

4. Look up the daily trading volume for the following stocks during a recent five day period:

- Merck


- Intel

- McDonald’s

-General Electric

Randomly select five stocks from the NYSE and examine their daily volume for the same five days.

a-What are the average volumes for the two samples


b-Would you expect this difference to have an impact on the efficiency of the markets for the two samples? Why or why?

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