Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta
(size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk premium =
3)7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.
A) 22.3%
B) 7.8%
C) 10.6%
D) none of the above

Question

Quizplus · Accepted Answer

The Fama-French three-factor model is given by:
Expected Return = Risk-Free Rate + Beta (Market Risk Premium) + Beta (Size Risk Premium) + Beta (Book-to-Market Risk Premium)
Expected Return = 5% + 1.4(7%) + 0.4(3.7%) - 1.1(5.2%)
Expected Return = 10.6%
Therefore, the correct answer is (C) 10.6%.

Given the Following Data for the a Stock: Risk-Free Rate