Question

Fama-French Three-Factor Model An analyst has modeled the stock of a company using a Fama-French three-factor model. The risk-free rate is 5%, the market return is 12%, the return on the SMB portfolio (rSMB) is 2.3%, and the return on the HML portfolio (rHML) is 5.5%. If ai = 0, bi = 1.2, ci = - 0.4, and di = 1.3, what is the stock's predicted return? Round your answer to two decimal places. %

Answer #1

Fama-French Three-Factor Model
An analyst has modeled the stock of a company using the
Fama-French three-factor model. The market return is 11%, the
return on the SMB portfolio (rSMB) is 3.4%, and the
return on the HML portfolio (rHML) is 5.6%. If
ai = 0, bi = 1.2, ci = -0.4, and
di = 1.3, what is the stock's predicted return? Do not
round intermediate calculations. Round your answer to two decimal
places.
=

An analyst has modeled the stock of a company using the
Fama-French three-factor model. The risk-free rate is 5%, the
market return is 9%, the return on the SMB portfolio is 3.2%, and
the return on the HML portfolio is 4.8%. If a = 0, b = 1.1, c =
-0.3, and d=1.2, what is the stock’s predicted return ?
Please show your solution step by step.

a. An analyst has modeled XYZ stock using the Fama & French
three factor model (FF3FM). Over the past few years the risk
premium on SMB was 2.75% and the risk premium on HML was 3.95%.
Regression analysis shows that XYZ’s beta coefficient on SMB is
2.25 and on HML is -2.25. If the risk–free rate is 3.25%, the
market risk premium is 7.50%, and XYZ’s market beta is 1.80, what
is a fair rate of return on XYZ according...

1. Your investment club has only two stocks in its portfolio.
$30,000 is invested in a stock with a beta of 0.5, and $45,000 is
invested in a stock with a beta of 1.8. What is the portfolio's
beta? Do not round intermediate calculations. Round your answer to
two decimal places.
2. AA Corporation's stock has a beta of 0.8. The risk-free rate
is 3%, and the expected return on the market is 11%. What is the
required rate of...

Explain the Fama-French Three-Factor Model.
Compare the APT with the CAPM

Suppose the average return on T-Bills was 2%. The average factor
risk premiums were the
following:
• market (MKT): 6%
• size (SMB): 2%
• value (HML): 3%
1
We have the following information about three fund managers:
Manager
Average
return,
%
Market beta
SMB
beta
HML
beta
Nancy
15
1.1
0.2
-0.7
John
10
-0.5
1.3
0.3
David
11
0.9
0.1
-1.1
What are the realized Fama-French three factor alphas for these
managers?

Suppose the average return on T-Bills was 2%. The average factor
risk premiums were the following:
• market (MKT): 6%
• size (SMB): 2%
• value (HML): 3%
We have the following information about three fund managers:
Manager Average return % Market beta SMB beta HML beta
Nancy 15 1.1 0.2 -0.7
John 10 -0.5 1.3 0.3
David 11 0.9 0.1 -1.1
What are the realized Fama-French three factor alphas for these
managers?

Compare and contrast the Capital Asset Pricing Model and the
Fama-French three-factor asset pricing models. Be sure to include
the similarities, the differences, and why each could be considered
superior to the other. Conclude by explaining which you feel is a
more effective way to assess if a specific security (or set of
securities) is fairly valued.

1. Compare and contrast the Capital Asset Pricing Model and the
Fama-French three-factor asset pricing models. Be sure to include
the similarities, the differences, and why each could be considered
superior to the other. Conclude by explaining which you feel is a
more effective way to assess if a specific security (or set of
securities) is fairly valued.

The following table shows the sensitivity of four stocks to the
three Fama−French factors. Assume that the interest rate is 2%, the
expected risk premium on the market is 7%, the expected risk
premium on the size factor is 3.7%, and the expected risk premium
on the book-to-market factor is 4.9%.
Boeing
Johnson &
Johnson
Dow Chemical
Google
Market
1.21
0.60
1.71
1.46
Size
−0.81
−0.18
0.31
−0.44
Book-to-market
0.47
−0.10
1.70
−1.25
Calculate the expected return on each stock....

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