Question

The following table shows the sensitivity of four stocks to the three Fama-French factors. Estimate the expected return on each stock assuming that the interest rate is 2%, the expected risk premium on the market is 7%, the expected risk premium on the size factor is 3.2%, and the expected risk premium on the book- to-market factor is 4.9% Ford Walmart Citicorp Apple Market 1.24 0.41 1.52 1.25 Size -0.07 -0.47 -0.01 -0.67 Book-to-market 0.28 0.25 0.85 -0.72

Answer 1

Expected Return =Risk free Rate+Beta*Expected Risk Premium on the market+Beta Size*Expected Risk Premium on the size factor+Beta Book-to-market*Expected Risk Premium on the book to market factor
Expected Return on Ford =2%+1.24*7%-0.07*3.2%+0.28*4.9% =11.828%
Expected Return on Walmart =2%+0.41*7%-0.47*3.2%-0.25*4.9% =2.141%
Expected Return on Citicorp =2%+1.52*7%-0.01*3.2%+0.85*4.9% =16.773%
Expected Return on Apple =2%+1.25*7%-0.67*3.2%-0.72*4.9% =5.078%