Write a macro function to estimate the cost of equity using the:
(i) Capital Asset Pricing Model (CAPM)
Ri = rf + Ba (rm-rf)
where:
rf = the rate of return on risk-free securities (typically Treasuries)
Ba = the beta of the investment in question
rm = the market's overall expected rate of return
(ii) Fama-French Model
Ri = rf + Bmkt (RMRF) + Bsize (SMB) + Bvalue (HML)
where:
rf = the rate of return on risk-free securities (typically Treasuries)
Bmkt = market beta

Bsize = Size beta
Bvalue = value beta
RMRF= return on a market weighted equity index in excess of the one month T-bill rate.
SMB= small minus big, a size (market capitalization factor). SMB is the average return
on three small-cap portfolios minus the average return on three large cap portfolios.
HML= high minus low. HML is the average return on two low book-to-market portfolios
minus the average return on two high low book-to-market portfolios.
Test your cost of equity macro function using the following data:
Risk-free rate =4.5%, Market Beta=1.25, Size Beta=-0.225, Value Beta=-0.348
RMRF=5.52%, SMB= 2.74%, HML=4.53%

Transcribed Image Text:

rf Ba rm CAPM rf Market Beta Size Beta Value Beta RMRF SMB HML Fama-French rf Ba rm CAPM rf Market Beta Size Beta Value Beta RMRF SMB HML Fama-French