(2005) has observed that, even after adjusting for beta, market model residuals are highly volatile, with annualized standard deviations of between 30 and 40 percent. This volatility is the result of price fluctuations caused by companyspecific news and random variation. Random variation, also known as noise, results, in part, from the trades of "mistaken investors" who trade on secondhand news and rumors as if they were information (Friedman 1953).
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