Assume the following data for a stock: Risk-free rate = 5%; Beta (market)= 1.5; Beta (size)= 0.3; Beta (book-to-market)= 1.1; Market risk premium = 7%; Size risk premium = 3.7%; and Book-to-market risk premium = 5.2%.Calculate the expected return on the stock using the Fama-French three-factor model.
A)22.3%
B)7.8%
C)11.5%
D)20.9%

Question

Quizplus · Accepted Answer

The expected return on the stock using the Fama-French three-factor model is:Expected return = Risk-free rate + Beta (market) * Market risk premium + Beta (size) * Size risk premium + Beta (book-to-market) * Book-to-market risk premium= 5% + 1.5 * 7% + 0.3 * 3.7% + 1.1 * 5.2%= 5% + 10.5% + 1.11% + 5.72%= 22.33%

Assume the Following Data for a Stock: Risk-Free Rate =