Hello, need help with the following:

Please submit answer on excel form

Chp. 9 problems

3. 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:

MKT = 7.5%, MACRO1 = 0.3%, and MACRO2 = 0.6%. You have also estimated the following

factor betas (i.e., loadings) for all three stocks with respect to each of these potential

risk factors:

FACTOR LOADING

Stock MKTMACRO1 MACRO2

QRS 1.24 0.420.00

TUV 0.91 0.54 0.23

WXY 1.03 0.09 0.00

a. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a

risk-free rate of 4.5%.

b. Calculate the expected returns for the three stocks using all three risk factors and the

same 4.5% risk-free rate.

c. Discuss the differences between the expected return estimates from the single-factor

model and those from the multifactor model. Which estimates are most likely to be

more useful in practice?

d. What sort of exposure might MACRO2 represent? Given the estimated factor betas, is it

really reasonable to consider it a common (i.e., systematic) risk factor?

4. Consider the following information about two stocks (D and E) and two common risk factors

(1 and 2):

Stockbi1bi2 E(Ri )

D1.23.4 13.1%

E2.6 2.6 15.4%

a. Assuming that the risk-free rate is 5.0%, calculate the levels of the factor risk premia that

are consistent with the reported values for the factor betas and the expected returns for

the two stocks.

b. You expect that in one year the prices for Stocks D and E will be $55 and $36, respectively.

Also, neither stock is expected to pay a dividend over the next year. What should

the price of each stock be today to be consistent with the expected return levels listed at

the beginning of the problem?

c. Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly

increases by 0.25% (i.e., from x% to (x + 0.25)%, where x is the value established in Part

a. What are the new expected returns for Stocks D and E?

d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your

opinion about what the stock prices will be in one year, what adjustment will be necessary

in the current (i.e., today's) prices?