Question

An analyst has modeled the stock of a company using the Fama French three factor model The market return is 11 the return on the SMB portfolio rSMB is 3.0 and the return on the HML portfolio HML is 5.5 If ai 0 bi 1.2 ci 0.4 and di 1.3 what is the stock's predicted return Do not round intermediate calculations Round your answer to two decimal places

Answer 1

Stock return = 18.15%

Step-by-step explanation:

As given:

Risk free rate = 3%

Market return = 11%

SMB = 4%

HML = 5.5%

Alpha = 0

Beta = 1.2

CiCi = -0.4

DiDi = 1.3

Computation:

Stock return can be calculated as follow:

Stock return = Risk free rate + Beta * (Market return - Risk free rate) + CiCi * SMB + DiDi * HML + Alpha

Stock return = 3% + 1.2 * (11% - 3%) + (-0.4) * 4% + 1.3 * 5.5% + 0

Stock return = 3% + 9.6% - 1.6% + 7.15% + 0

Stock return = 18.15%

Hence, Predicted stock return is 18.15%.