Question

The following table shows the sensitivity of four stocks to the three Fama−French factors. Assume the interest rate is 5%, the expected risk premium on the market is 8%, the expected risk premium on the size factor is 3.7%, and the expected risk premium on the book-to-market factor is 3.9%.

	Boeing	Campbell Soup	Dow Chemical	Apple
Market	1.31	.90	1.23	1.26
Size	−.67	−.51	.50	−.53
Book-to-market	−.68	.21	.31	−.98

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

Average Expected Return of Boeing = Risk Free rate + Beta *(Market return Risk Premium ) + Coefficient 2* Expected Risk Premium on the size factor) + Coefficient 3* ( the expected risk premium on the book-to-market factor)
=5%+1.31*8%-0.67*3.7%-0.68*3.9% = 10.35%

Average Expected Return of Campbell Soup =5%+0.90*8%-0.51*3.7%+0.21*3.9% = 11.13%
Average Expected Return of Dow Chemical =5%+1.23*8%+0.50*3.7%+0.31*3.9% = 17.90%
Average Expected Return of Apple =5%+1.26*8%-0.53*3.7%-0.98*3.9% = 9.30%