The market return is 10% and the risk free rate is 3%. Rascals Inc. has a market beta of 1.0, a SMB beta of −.60, and a HML beta of −0.85. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Rascal Inc. stock?
A) 5.85%
B) 7.10%
C) 13.2%
D) 15.3%

Question

Quizplus · Accepted Answer

The Fama-French Three Factor Model is calculated as: Expected Return = Risk-Free Rate + (Market Beta * Market Risk Premium) + (SMB Beta * SMB Risk Premium) + (HML Beta * HML Risk Premium). Substituting the given values: 3% + (1.0 * (10% - 3%)) + (-0.60 * 2%) + (-0.85 * 2%) = 7.10%.

The Market Return Is 10% and the Risk Free Rate