Question

You model the stock returns using the Fama-French 3-factor model.

The expected return for the market is 14%, the risk-free rate is 2%, the expected return on the Small-Minus-Big (SMB) portfolio is 2%, and the expected return on the High-Minus-Low (HML) portfolio is 1.8%.

Canopy Growth Corporation (CGC) as a beta with respect to the market of 0.9, a beta with respect the SMB portfolio of -0.14, and a beta with respect to the HML portfolio of 0.1.

According the the Fama-French model, what is the expected return of CGC?

{Give your answer as a percentage with 2 decimals, e.g., if the answer is 0.0345224 (or 3.45224%) , enter 3.45 as your answer.}

Answer 1

Expected return of CGC = Risk free rate + Beta of Market * (Marker return - Risk free rate) + Beta of Small-Minus-Big * Expected return of Small-Minus-Big + Beta of High-Minus-Low * Expected return of High-Minus-Low

Expected return of CGC = 2% + 0.9 * (14% - 2%) + (-0.14) * 2% + 0.1 * 1.8%

Expected return of CGC = 12.7%