Question

The following is the Fama-French Three Factor model estimated for ECN Inc. [Notice here for alpha, 1 would be 1%.] ECN Inc. Three Factor Model Alpha Factor a Rm-Rf SMB HML Coefficient 1 1.30 1.10 -0.67 P-Value 0.12 0.00 0.04 0.09 a) Using only the variables statistically significant at a 5% level, what is the expected return on ECN Inc. if the risk-free rate is 1%, market premium is 12%, small stocks outperform large by 3% and value stocks outperform growth stocks by 5%.

Answer 1

The expected return on ECN Inc. can be calculated using the Fama-French Three Factor Model and the given variables. The expected return is 12.19%.

Step-by-step explanation:

To calculate the expected return on ECN Inc., we need to use the Fama-French Three Factor Model. From the information given, we know that the risk-free rate is 1%, the market premium is 12%, small stocks outperform large stocks by 3%, and value stocks outperform growth stocks by 5%. Using the variables that are statistically significant at a 5% level, which are Rm-Rf and SMB, we can calculate the expected return as follows:

Expected Return = Risk-Free Rate + (Rm-Rf x Market Premium) + (SMB x Small Stocks Premium)

Expected Return = 1% + (12% x 1.10) + (-0.67 x 3%)

Expected Return = 1% + 13.2% - 2.01%

Expected Return = 12.19%