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: MKT = 7.1%, IMACRO1 = -0.5%, and AMACRO2 = 0.9%. 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 MKT MACRO1 MACRO2 QRS 1.31 -0.41 0.00 TUV 0.88 0.55 0.33 WXY 1.00 -0.11 0.00 a. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 3.7%. 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 3.7% 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 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: MKT = 7.1%, IMACRO1 = -0.5%, and AMACRO2 = 0.9%. 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 MKT MACRO1 MACRO2 QRS 1.31 -0.41 0.00 TUV 0.88 0.55 0.33 WXY 1.00 -0.11 0.00 a. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 3.7%. 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 3.7% 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
