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An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.5%, and the return on the HML portfolio (rHML) is 6.0%. If ai = 0, bi = 1.2, ci = -0.4, and di = 1.3, what is the stock's predicted return? Do not round intermediate calculations. Round your answer to two decimal places

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Answer #1

Assume rF is 0% as it is not given.

Stock's Return = ai + [bi * (Market Return - rF)] + [ci * rSMB] + [di * rHML]

= 0 + [1.2 * (10% - 0%)] + [-0.4 * 3.5%] + [1.3 * 6%]

= 0 + 12% - 1.4% + 7.8% = 18.4%

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