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

Finance Nov 13, 2020

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.lrm If the market index subsequently rises by 7.3% and Ford's stock price rises by 7%, 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.) Abnormal return %

Expert Solution

The return on the market is 7.3%. Therefore, the forecast monthly return for Ford is: 0.10% +(1.1 × 7.3%) = 8.1300%. Ford’s actual return was 7%, so the abnormal return was -1.13%.

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