Question

You have the following assets available to you:

Asset | Expected Return |

Riskless debt | 3.8% |

Portfolio of small cap stocks | 9.0% |

Portfolio of large cap stocks | 7.3% |

Portfolio of growth stocks | 13.3% |

Portfolio of value stocks | 8.8% |

S&P500 index fund | 9.9% |

What is the cost of equity for a firm with a market beta of 3.4, a SMB beta of 1.9, and a HML beta of 2.4? You may assume this firm has an alpha of zero. Please give your answers to four decimal places - an answer of 9.54% would be represented as 0.0954.

Answer #1

Assuming Alpha as zero, the cost of Equity is calculated using the following equation of Fama-French model three factor model

Cost of Equity

Where, r_{f} is risk free rate

is Beta or factor coefficients

r_{m} is market return

SMB is size premium (Small minus Big)

HML is value premium (High minus low)

Cost of Equity = 0.038 + 3.4*(0.099-0.038) + 1.9*(0.09-0.073) + 2.4*(0.088-0.133)

= 0.038 + 0.2074 + 0.0323 - 0.108

= 0.1697

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 13 minutes ago

asked 28 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago