48 You consider buying a share of stock at a price of 25 The

48. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock\'s beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock\'s abnormal return?

A. 1% B. 2% C. -1% D. -2% E. None of the above

Please show work.

Solution

Calculation of the abnormal return of the stock E {R} (28-25+1.5)/25 18% Return Risk Free Rate+ Beta* Market Risk Premium 6+1.1(16-6) 6+11 17% The abnormal Return = 18-17 1% The Correct Option is A. 1%