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 (MACRO1 and MACRO2). These values are: _MKT = 6.9%, _MACRO1 = -0.5%, and _MACRO2 = 0.4%. 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		MACRO1		MACRO2
QRS	1.26		-0.32		0.00
TUV	0.88		0.47		0.13
WXY	1.09		-0.06		0.00

1. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.1%. Round your answers to three decimal places.

   Expected return for stock QRS: %

   Expected return for stock TUV: %

   Expected return for stock WXY: %

2. Calculate the expected returns for the three stocks using all three risk factors and the same 4.1% 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: %

3. What sort of exposure might MACRO2 represent?

   MACRO2 might represent -Select- (a systematic or industry-specific) factor.