An index model regression applied to past monthly returns in Ford's stock price produces the...

Question:

An index model regression applied to past monthly returns in Ford's stock price produces the following estimates, which are believed to be stable over time:

rF = 0.1% + 1.1rM

If the market index subsequently rises by 7.1% and Ford's stock price rises by 7%, what is the abnormal change in Ford's stock price?

Abnormal Return:

Abnormal return on a stock is the return in excess of the one predicted by a model. The abnormal return can be both positive and negative. It is positive if the stock outperforms its expected return and it is negative if it underperforms relative to the expected return.

Answer and Explanation: 1

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Since the slope in the model is 1.1, for every 1% increase in the market return, Ford's return is expected to increase by 1.1%. Therefore, the...

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Stocks: Understanding Investment Performance

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Chapter 8 / Lesson 6
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Stocks are an investment into the shares or ownership of a company and repay the shareholder dividends throughout the year. Learn more about stocks, investment performance, dividends, the role of the stock exchange, and how to calculate earnings.


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