(a) Given the following regression results, Estimated \'s for Stock A: = .85 SMB
ID: 2650780 • Letter: #
Question
(a) Given the following regression results,
Estimated 's for Stock A: = .85 SMB = 1.04 HML = -.39
Estimated 's for Stock B: = 1.18 SMB = -.59 HML = .14
Historical Average Annual Return: Rm - Rf = .0781
RSMB = .0364
RHML = .0412
Current Risk-Free Rate: Rf = .01
Estimate the expected annual return on the market and on Stock A and Stock B for 2015
(i) using CAPM
(ii) using the Fama/French 3 Factor Model.
(b) Why does the Fama/French model give a different answer than CAPM? Explain.
(c) Which company A or B is larger in terms of market capitalization and which has higher growth
options? Explain.
Explanation / Answer
Answer:(i) (a) CAPM:
Stock A: Rf+beta (Rm-Rf)
=.01+0.85(.0781)
=7.6385%
Stock B: Rf+beta (Rm-Rf)
=.01+1.18(.0781)
=10.2158%
Answer: (ii) using the Fama/French 3 Factor Model.
E(R) = Rf +
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