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 1%, and the expected return on the High-Minus-Low (HML) portfolio is 1.3%.

Canopy Growth Corporation (CGC) as a beta with respect to the market of 0.9, a beta with respect the SMB portfolio of -0.12, and a beta with respect to the HML portfolio of 0.11.

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 *(Market return - Risk free rate ) + Coefficient 2* Return of SMB + Coefficient 3* Return of HML
=2%+0.90*(14%-2%)+-0.12*1%+0.11*1.3% =12.82%