The following is an excerpt from a press release from Costco Wholesale Corporation.

Costco Wholesale Corporation Reports Third Quarter and Year-to-Date Operating Results for Fiscal Year 2013

ISSAQUAH, WA -- (Marketwired) -- 05/30/13 -- Costco Wholesale Corporation ("Costco" or the "Company") (NASDAQ: COST) announced today its operating results for the third quarter (twelve weeks) and the first thirty-six-weeks of fiscal 2013, ended May 12, 2013. Net sales for the quarter increased eight percent, to $23.55 billion, from $21.85 billion last year. Net sales for the first thirty-six weeks increased eight percent, to $71.10 billion, from $65.54 billion last year.

Comparable sales were as follows:

	12 Weeks		36 Weeks
U.S.	6%		6%
International	4%		6%
Total	5%		6%

Changes in gasoline prices and foreign exchange rates had negative impacts on comparable sales for the 12-week period; and immaterial impacts for the 36-week period. Excluding these effects, comparable sales were as follows:

	12 Weeks		36 Weeks
U.S.	7%		6%
International	7%		6%
Total	7%		6%

Net income for the quarter was $459 million, or $1.04 per diluted share, compared to $386 million, or $.88 per diluted share, last year. Net income for the first thirty-six weeks was $1.42 billion, or $3.23 per diluted share, compared to $1.10 billion, or $2.50 per diluted share, last year. Net income for the thirty-six weeks was positively impacted by a second quarter $62 million ($.14 per diluted share) tax benefit in connection with the portion of the special cash dividend paid in December 2012 to the Company 401(k) plan participants.

Costco currently operates 627 warehouses, including 449 in the United States and Puerto Rico, 85 in Canada, 33 in Mexico, 24 in the United Kingdom, 15 in Japan, nine in Taiwan, nine in Korea and three in Australia. The Company plans to open up to an additional nine new warehouses prior to the end of its fiscal year on September 1, 2013. Costco also operates electronic commerce web sites, at www.costco.com (U.S.), www.costco.ca (Canada), and www.costco.co.uk (United Kingdom).

Costco's stock (COST) which had ended at USD 111.88 on May 30, opened at USD 112.12 the following day when markets opened, but ended that day at USD 109.63, or 2.01% lower than its previous close.

In comparison, the broader NASDAQ index closed 1.01% lower for May 31. The 1-year US Treasury bill rate was unchanged at 0.15% p.a. (or 0.0004% per day).

There were no significant revisions by analysts following the earnings release.

REQUIRED:

a) Using the market model (R_jt = a_j + _jR_mt + e_jt, where a_j=R_f*(1-_j)), estimate the one-day expected return on Costco shares for May 31, 2013. Costco's stock has a beta of 0.51. (4 marks)

b) Estimate the one-day abnormal return on Costco's stock for May 31, 2013. (2 marks)

c) Costco's average trading volume is approximately 2 million shares per day. However, on May 30 and 31, its trading volume was almost 3.5 million shares, or nearly 75% higher. What conclusions can we draw from this increase in trading volume? (2 marks)

d) Use the efficient markets hypothesis to evaluate the market response to Costco's earnings release (4 marks)

e) Given that Costco's shares have a beta of 0.51, explain whether you expect its earnings response coefficient to be high or low (2 marks)

f) How does Costco stock compare in terms of risk to

Walmart stock (WMT) whose beta is 0.36? (1 mark)

Sears (SHLD) whose beta is 2.81? (1 mark)

g) Explain briefly the concept of portfolio diversification. If an investor invests equal amounts of money into shares of Costco, Wal-Mart and Sears, will she be able to achieve the full benefits of diversification? (4 marks)