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Problem $7-10$

You have been assigned the task of estimating the expected returns for three different stocks: QRS$,$ TUV, and WXY$.$ Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio $($MKT$),$ and two variables capturing general macroeconomic exposures $($MACRO$1$ and MACRO$2).$ These values are: $\backslash$lambda MKT $=7\mathrm{.}5\%,\backslash$lambda MACRO$1=-0\mathrm{.}1\%,$ and $\backslash$lambda MACRO$2=0\mathrm{.}9\%.$ You have also estimated the following factor betas $($i$.$e$.,$ loadings$)$ for all three stocks with respect to each of these potential risk factors:

FACTOR LOADING

Stock MKT MACRO$1$ MACRO$2$

QRS $1\mathrm{.}32-0\mathrm{.}420\mathrm{.}00$

TUV $0\mathrm{.}990\mathrm{.}630\mathrm{.}19$

WXY $1\mathrm{.}10-0\mathrm{.}080\mathrm{.}00$

Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk$-$free rate of $3\mathrm{.}5\%.$ Round your answers to three decimal places.

Expected return for stock QRS:

$\%$

Expected return for stock TUV:

$\%$

Expected return for stock WXY:

$\%$

Calculate the expected returns for the three stocks using all three risk factors and the same $3\mathrm{.}5\%$ risk$-$free rate. Round your answers to three decimal places.

Expected return for stock QRS:

$\%$

Expected return for stock TUV:

$\%$

Expected return for stock WXY:

$\%$

What sort of exposure might MACRO$2$ represent?

MACRO$2$ might represent

$-$Select$-$

factor.