Question

Here are alphas and betas for Estee Lauder and Caterpillar Tractor for the 60 months ending June 2017. Alpha is expressed as percent per month. Alpha Beta Estee Lauder 0.48 0.70 Caterpillar Tractor -0.41 1.26 Calculate the abnormal return?

Answer 1

Abnormal return of stock is alpha or excess return; if a stock has a positive alpha then estimated return is more than expected return and if a stock has a negative alpha then estimated return is less than expected return.

Here alpha for Estee Lauder is 0.48% per month, therefore Estee Lauder’s abnormal return is 0.48% and its estimated return is more than its expected return by 0.48% per month.

And alpha for Caterpillar Tractor is -0.41% per month, therefore Caterpillar Tractor’s abnormal return is -0.41% and its estimated return is less than its expected return by 0.41% per month.