An analyst has been following Ken-McGee Corporation (NYSE: KMG) for several years. He has consistently felt that the stock is undervalued and has always recommended a strong buy. Another analyst who has been following Nucor Corporation (NYSE: NUE) has been similarly bullish. The tables below summarize the prices, dividends, total returns, and estimates of the contemporaneous required returns for KMG and NUE from 1998 to 2001.
Data for KMG
|
Year |
Price at |
Dividends |
Total Annual |
Contemporaneous |
|
1997 |
$54.22 |
|||
|
1998 |
33.97 |
$1.80 |
-34.00% |
26.60% |
|
1999 |
54.38 |
1.8 |
65.4 |
19.6 |
|
2000 |
63.96 |
1.8 |
20.9 |
-8.5 |
|
2001 |
53.93 |
1.8 |
-12.9 |
-11 |
Data for NUE
|
Year |
Price at |
Dividends |
Total Annual |
Contemporaneous |
|
1997 |
$45.66 |
|||
|
1998 |
41.31 |
$0.48 |
-8.50% |
29.20% |
|
1999 |
52.93 |
0.52 |
29.4 |
21.5 |
|
2000 |
38.96 |
0.6 |
25.3 |
-9.3 |
|
200 1 |
52.8 |
0.68 |
37.3 |
12.1 |
The total return is the price appreciation and dividends for the year divided by the price at the end of the previous year. The contemporaneous required return is the average actual return for the year realized by stocks that were of the same risk as KMG and NUE, respectively.
A. Without reference to any numerical data, what can be said about each analyst”s ex ante alpha for KMG and NUE, respectively?
B. Calculate the ex post alphas for each year 1998 through 2001 for KMG and for