16. The Fama-French three-factor model

Consider the following two statements and identify which model each describes:

This model maintains that the only risk rewarded in the market with additional return is systematic or nondiversifiable risk.

A. Fama-French three-factor model B. Capital Asset Pricing Model

This model has been used more by academic researchers than managers of actual companies. A. Capital Asset Pricing Model B. Fama-French three-factor model

Carlos, an analyst at Butoh Analytics (BA), models the stock of the company. Suppose that the risk-free rate rRFrRF = 6.5%, the required market return rMrM = 12.5%, the risk premium for small stocks rSMBrSMB = 3.2%, and the risk premium for value stocks rHMLrHML = 4.8%. Suppose also that Carlos ran the regression for Butoh Analyticss stock and estimated the following regression coefficients: aBAaBA = 0.00, bBAbBA = 0.9, cBAcBA = 0.2, and dBAdBA = 0.3. If Carlos uses a Fama-French three-factor model, then which of the following values correctly reflects the stocks required return?

A. 17.94% B. 7.48% C. 13.98% D. 3.18%