Question

An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 9%, the return on the SMB portfolio (r_SMB) is 2.6%, and the return on the HML portfolio (r_HML) is 5.4%. If a_i = 0, b_i = 1.2, c_i = -0.4, and d_i = 1.3, what is the stock's predicted return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Stock's predicted return = a_i + b_i * (Market return - Risk free rate) + c_i * return on the SMB portfolio (r_SMB) + d_i * return on the HML portfolio (r_HML)

Stock's predicted return = 0 + 1.2 * (9% - 0%) + (-0.4) * 2.6% + 1.3 * 5.4%

Stock's predicted return = 16.78%