Question

Allison, an analyst at Fantastique Tech (FT), models the stock of the company. Suppose that the risk-free rate rRFrRF = 5%, the required market return rMrM = 10%, the risk premium for small stocks rSMBrSMB = 3.2%, and the risk premium for value stocks rHMLrHML = 4.8%. Suppose also that Allison ran the regression for Fantastique Tech’s stock and estimated the following regression coefficients: aFTaFT = 0.00, bFTbFT = 1.2, cFTcFT = -20.4, and dFTdFT = -1.3. If Allison uses a Fama-French three-factor model, then which of the following values correctly reflects the stock’s required return?

-72.52%

-60.52%

-50.48%

-65.52%

Answer 1