Question: Suppose that the Fama-French 3-factor model describes security returns, that is []=[]+[]+[] Assume that the risk-free rate is 1%, expected market return (E[r m ])

Suppose that the Fama-French 3-factor model describes security returns, that is

[]=[]+[]+[]

Assume that the risk-free rate is 1%, expected market return (E[r_m]) is 6%, size premium (E[SMB]) is 2% and the value premium (E[HML]) is 4%. Finally, suppose that Stock A has the following factor betas: _A = 2, _A = 0.8, _A = 0.7.

What is the expected return of stock A?

Group of answer choices

18.4%

3.2%

15.4%

5.6%

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