On the last trading day of 2000 (29 December 2000), an analyst is reviewing his valuation of Wal-Mart Stores (NYSE: WMT). The analyst has the following information and assumptions:
- The current price is $53.12.
- The analyst”s estimate of WMT”s intrinsic value is $56.00.
- In addition to the full correction of the difference between WMT”s current price and its intrinsic value, the analyst forecasts additional price appreciation of $4.87 and a cash dividend of $0.28 over the next year.
- The required rate of return for Wal-Mart is 9.2 percent.
A. What is the analyst”s expected holding-period return on WMT?
B. What is WMT”s ex ante alpha?
C. Calculate ex post alpha, given the following additional information.
Over the next year, 29 December 2000 through 3 1 December 2001, Wal-Mart”s actual rate of return was 8.9 percent.
In 2001, the realized rate of return for stocks of similar risk was – 10.4 percent.