Question

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: λ_MKT = 7.6%, λ_MACRO1 = -0.4%, and λ_MACRO2 = 0.5%. 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	1.30		-0.38		0.00
TUV	0.90		0.54		0.16
WXY	0.93		-0.12		0.00

1. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.3%. 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 4.3% 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 systematican industry-specificItem 7 factor.

Answer 1