An index model regression applied to past monthly returns in Ford’s stock price

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:

If the market index subsequently rises by 8.4% and Ford’s stock price rises by 8%, what is the abnormal change in Ford’s stock price? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

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:

If the market index subsequently rises by 8.4% and Ford’s stock price rises by 8%, what is the abnormal change in Ford’s stock price? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

The return on the market is 8.4%. Therefore, the forecast monthly return for Ford is: 0.10% + (1.1 × 8.4%) = 9.34%. Ford’s actual return was 8%, so the abnormal return was -1.34%.

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