Question

The following table shows the sensitivity of four stocks to the three Fama-French factors. Assume the interest rate is 3%, the expected risk premium on the market is 6%, the expected risk premium on the size factor is 3.6%, and the expected risk premium on the book- to-market factor is 4.8%. Market Size Book-to-market Ford 1.33 -0.16 0.85 Walmart 0.72 -0.47 -0.27 Citigroup 1.14 -0.08 Apple 1.34 -0.58 -0.63 0.94 Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Expected return Ford Walmart Citigroup Apple

Answer 1

Return = risk free rate+market risk premium*market beta+size premium*size beta+BTM premium*BTM beta

Ford

=3+6*1.33+3.6*(-0.16)+4.8*(0.85)

=14.48%

Walmart

=3+6*(0.72)+3.6*(-0.47)+4.8*(-0.27)

=4.33%

Citigroup

=3+6*1.14+3.6(-0.08)*+4.8*0.94

=14.06%

Apple

=3+6*1.34+3.6*(-0.58)+4.8*(-0.63)

=5.93%