# nhw7a - Homework 7 1. Abnormal returns, if a stock has...

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Homework 7 1. Abnormal returns, if a stock has a=.004, b=1.2, A. Using the market model (eq. 11.1), find the expected percent return if the market increases by 2%. E(r )= .004+ 1.2*(.02)=.028 B. If the actual return is 2%, 3%, or 4%, calculate the abnormal return. 2%: .02- .028= -.008 3%: .03- .028= .002 4%: .04- .028= .012 2. A. If a stock costs \$55 one month and drops to \$45 the next month, what is the expected stock price the next month, if we assume the stock follows a random walk? \$45 dollars as the expectation of a random walk is no change at all. B. Explain both technical and fundamental analysis and what form of the efficient market hypothesis corresponds to each. Technical analysis uses past information on stock prices to be able to estimate profit opportunities, the weak form of the EMH rules this out. Fundamental analysis looks at the earnings and dividend prospects and other balance sheet items to predict profit opportunities, the semi strong form rules this out. 3.

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## nhw7a - Homework 7 1. Abnormal returns, if a stock has...

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