Question

The following table shows the sensitivity of four stocks to the three Fama−French factors. Assume the interest rate is 3%, the expected risk premium on the market is 6%, the expected risk premium on the size factor is 3.2%, and the expected risk premium on the book-to-market factor is 5.1%.

	Boeing	Campbell Soup	Dow Chemical	Apple
Market	1.20	.68	1.12	1.15
Size	−.56	−.53	.35	−.50
Book-to-market	−.83	.21	.20	−.67

Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	Expected Return
Boeing	%
Campbell Soup	%
Dow Chemical	%
Apple	%

Answer 1

According to the Fama - French Model;

E(rS) = R_f + [beta₃ x (MRP)] + [b_s x SMB] + [b_v x HML]

For Boeing;

E(rS) = 3% + [1.2 x 6%] + [-0.56 x 3.20%] + [-0.83 x 5.10%]

= 3% + 7.2% - 1.792% - 4.233% = 4.175, or 4.18%

For Campbell Soup;

E(rS) = 3% + [0.68 x 6%] + [-0.53 x 3.20%] + [0.21 x 5.10%]

= 3% + 4.08% - 1.696% + 1.071% = 6.455, or 6.46%

For Dow Chemical;

E(rS) = 3% + [1.12 x 6%] + [0.35 x 3.20%] + [0.20 x 5.10%]

= 3% + 6.72% + 1.12% + 1.02% = 11.86%

For Apple;

E(rS) = 3% + [1.15 x 6%] + [-0.50 x 3.20%] + [-0.67 x 5.10%]

= 3% + 6.90% - 1.60% - 3.417% = 4.883, or 4.88%