The following equation is reproduced from the study by Fama and French of returns between 1963 and 1990.
Rt = 0.0177 − 0.11 ln (MV) + 0.35 ln (BV∕MV)
where MV is the market value of equity in hundreds of millions of dollar and BV is the book value of equity in hundreds of millions of dollars. The return is a monthly return.
a. Estimate the expected annual return on Lucent Technologies. The market value of equity is $ 180 billion, and the book value of equity is $ 73.5 billion.
b. Lucent Technologies has a beta of 1.55. If the riskless rate is 6% and the risk premium for the market portfolio is 5.5%, estimate the expected return.
c. Why are the expected returns different under the two approaches?