Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta
(size) = 0.3; 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) 11.5%
D) none of the above

Question

Quizplus · Accepted Answer

The expected return using the Fama-French three-factor model is calculated as:  Expected Return = Risk-free rate + (Beta_market * Market risk premium) + (Beta_size * Size risk premium) + (Beta_book-to-market * Book-to-market risk premium)  = 5% + (1.5 * 7%) + (0.3 * 3.7%) + (1.1 * 5.2%)  = 5% + 10.5% + 1.11% + 5.72%  = 22.33%

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