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eBook Problem 7-10 You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary
eBook Problem 7-10 You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: AMKT = 7.9%, AMACRO1 = -0.5%, and AMACRO2 = 0.8%. You have also estimated the following factor betas (i.e., loadings) for all three stocks with respect to each of these potential risk factors: Stock QRS TUV WXY FACTOR LOADING MKT MACRO1 MACRO2 1.17 -0.35 0.00 0.89 0.98 0.56 -0.05 0.14 0.00 a. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.1%. Round your answers to three decimal places. Expected return for stock QRS: % Expected return for stock TUV: Expected return for stock WXY: % % b. Calculate the expected returns for the three stocks using all three risk factors and the same 4.1% risk-free rate. Round your answers to three decimal places. Expected return for stock QRS: % Expected return for stock TUV: Expected return for stock WXY: % % c. What sort of exposure might MACRO2 represent? MACRO2 might represent -Select- factor.
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