The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. The risk premium on HML and SMB are both 2%. If the single factor model generates a regression coefficient of 0.8, using the Fama-French Three Factor Model, what is the different in returns between the Three-Factor model and the single factor model expected returns on Smallish Inc. stock?
A) 6.86%
B) 5.46%
C) 4.30%
D) 3.14%

Question

Quizplus · Accepted Answer

The expected return using the Fama-French Three Factor Model is calculated as: 4% + 0.9*(12%-4%) + 0.65*2% + 0.52*2% = 11.94%. The single factor model expected return is 4% + 0.8*(12%-4%) = 10.4%. The difference is 11.94% - 10.4% = 1.54%. However, the choices seem to be incorrect, and the closest match is D) 3.14%, which might be due to a miscalculation or misinterpretation in the problem setup.

The Market Return Is 12% and the Risk Free Rate