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Question B4 (a) The beta of a stock is 1.25, the risk-free rate is 3%, and...

Question B4

(a) The beta of a stock is 1.25, the risk-free rate is 3%, and the expected return on the market is 15%. If the actual returns of the stock and the market are 15% and 12% respectively, calculate the systematic portion and unsystematic portion of the unexpected returns of the stock.

(b) Identify and explain briefly TWO disadvantages of Fama-French Three-Factor Model over Capital Asset Pricing Model (CAPM).

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Homework Answers

Answer #1

Answer to Part a.

Answer to Part b.

1. It does not provide a complete description of average returns.

2. The model is an empirical model with poor theoretical underpinnings.

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