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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

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 = 6.9%, MACRO1 = -0.5%, and MACRO2 = 0.4%. 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 1.26 -0.32 0.00
TUV 0.88 0.47 0.13
WXY 1.09 -0.06 0.00
  1. 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: %

  2. 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: %

  3. What sort of exposure might MACRO2 represent?

    MACRO2 might represent -Select- (a systematic or industry-specific) factor.

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