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Suppose the market risk premium is 7%, SMB is 3%, and HML is 5%. There are two stocks in the market: Stock A has an
Suppose the market risk premium is 7%, SMB is 3%, and HML is 5%. There are two stocks in the market: Stock A has an expected return of 20% with M=1.2, SMB=2, HML=1. Stock B has an expected return of 10% with M=0.5, SMB=0, HML=1. The risk-free rate is 0%. What portfolio of Stock A and Stock B will have the highest three-factor alpha based on the Fama-French three factor model (assume weights in Stock A and B cannot be negative)?
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