16. Three-factor model (S8.4) The following table shows the sensitivity of four stocks to the three FamaFrench
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16. Three-factor model (S8.4) The following table shows the sensitivity of four stocks to the three Fama–French factors. Estimate the expected return on each stock assuming that the interest rate is 2%, the expected risk premium on the market is 7%, the expected risk premium on the size factor is 3.0%, and the expected risk premium on the book-to-market factor is 4.5%.
Factor Risk Exposures Market Interest Rate Yield Spread Stock (b1) (b2) (b3)
P 1.0 –2.0 –0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Ford Walmart Citigroup Apple Market 1.24 0.41 1.52 1.25 Size –0.07 –0.47 –0.01 –0.67 Book-to-market 0.28 –0.25 0.85 –0.72 CHALLENGE
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Related Book For
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans
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