Question 2 You have the following information for MST, CSX and ABC stocks: Factor Betas Factors...
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Question 2 You have the following information for MST, CSX and ABC stocks: Factor Betas Factors λ MST CSX ABC MKT 7.23% 0.966 1.042 1.178 SMB 2.00% -0.018 -0.043 0.526 HML 4.10% -0.388 0.37 0.517 where is the risk premium related to each of the Fama-French three factors, namely excess return on the market (MKT = RM - RF), small-minus-big factor (SMB), and high-minus-low factor (HML). The last three columns are the beta sensitivity (exposure) of each stock to the three factors. It is assumed that the zero-beta return λo is equal to zero. Required (a-c): a. Using the Fama-French three-factor model, compute the expected return on each of the three stocks. b. It is now 2017. Suppose you believe that the actual prices of the three stocks in 2018 will be as follows: c. Stock MST CSX ABC Current stock price ($) | Future stock price ($) in 2017 $105.00 $ 61.25 $ 61.25 in 2018 $ 110.63 $62.75 $75.00 If your forecasts of future stock prices are correct, what should be the current stock prices implied by the Fama-French three-factor model? It is assumed that the three stocks do not pay dividends. Based on your calculations, how do you take advantages of any price discrepancies? What is the profit of the arbitrage, if any? In your answer, please also provide the definition of riskless arbitrage. Question 2 You have the following information for MST, CSX and ABC stocks: Factor Betas Factors λ MST CSX ABC MKT 7.23% 0.966 1.042 1.178 SMB 2.00% -0.018 -0.043 0.526 HML 4.10% -0.388 0.37 0.517 where is the risk premium related to each of the Fama-French three factors, namely excess return on the market (MKT = RM - RF), small-minus-big factor (SMB), and high-minus-low factor (HML). The last three columns are the beta sensitivity (exposure) of each stock to the three factors. It is assumed that the zero-beta return λo is equal to zero. Required (a-c): a. Using the Fama-French three-factor model, compute the expected return on each of the three stocks. b. It is now 2017. Suppose you believe that the actual prices of the three stocks in 2018 will be as follows: c. Stock MST CSX ABC Current stock price ($) | Future stock price ($) in 2017 $105.00 $ 61.25 $ 61.25 in 2018 $ 110.63 $62.75 $75.00 If your forecasts of future stock prices are correct, what should be the current stock prices implied by the Fama-French three-factor model? It is assumed that the three stocks do not pay dividends. Based on your calculations, how do you take advantages of any price discrepancies? What is the profit of the arbitrage, if any? In your answer, please also provide the definition of riskless arbitrage.
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a Using the FamaFrench threefactor model we can compute the expected return on each of the three stocks by multiplying the factor betas of each stock ... View the full answer
Related Book For
Accounting Tools for Business Decision Making
ISBN: 978-1118128169
5th edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Posted Date:
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