An analyst has estimated the following factor loadings and fator premiums for a stock: Market Risk...

 

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An analyst has estimated the following factor loadings and fator premiums for a stock: Market Risk premium Size factor (SMB) Value Factor (HML) Factor Loading 1.1 0.4 0.2 Estimated Factor Premium 7.5% 4.1% 5.2% Suppose that the long-run risk-free return is 3%. What is the expected return for the stock according to the CAPM and Fama-French 3-factor model (1 Mark)? Explain the meanings of the size and value factors in the Fama-French 3 factor model and how they are constructed (2 Marks). An analyst has estimated the following factor loadings and fator premiums for a stock: Market Risk premium Size factor (SMB) Value Factor (HML) Factor Loading 1.1 0.4 0.2 Estimated Factor Premium 7.5% 4.1% 5.2% Suppose that the long-run risk-free return is 3%. What is the expected return for the stock according to the CAPM and Fama-French 3-factor model (1 Mark)? Explain the meanings of the size and value factors in the Fama-French 3 factor model and how they are constructed (2 Marks).

Answer rating: 100% (QA)

ANSWERS The expected return is given as follows The riskfree rate beta x the market risk premium SMB ... View the full answer