Assume the following data for a stock: Risk-free rate = 5 percent; beta (market)= 1.5; beta (size)= 0.3; beta (book-to-market)= 1.1; market risk premium = 7 percent; size risk premium = 3.7 percent; and book-to-market risk premium = 5.2 percent. Calculate the expected return on the stock using the Fama-French three-factor model.
A)22.3 percent
B)7.8 percent
C)11.5 percent
D)20.9 percent

Question

Quizplus · Accepted Answer

The Fama-French three-factor model is given by the formula: Expected Return = Risk-free rate + (Beta(market) * Market risk premium) + (Beta(size) * Size risk premium) + (Beta(book-to-market) * Book-to-market risk premium). Plugging in the given values: Expected Return = 5% + (1.5 * 7%) + (0.3 * 3.7%) + (1.1 * 5.2%) = 5% + 10.5% + 1.11% + 5.72% = 22.33%, which rounds to 22.3 percent.

Assume the Following Data for a Stock: Risk-Free Rate =