1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%
1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the
following coefficients. You also estimate risk premiums for each factor. Calculate the cost of
equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The
risk-free rate is 4%.
Stock
Mkt
A
B
Risk premiums
1.1
1.0
5%
SMB
-1.2
-2.0
HML
-1.0
-1.5
3%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd050ae8a-f106-452f-913a-ddf5e950b909%2Fbaadbebe-da5b-407f-a4b7-945322d0cdcb%2F125l82_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the
following coefficients. You also estimate risk premiums for each factor. Calculate the cost of
equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The
risk-free rate is 4%.
Stock
Mkt
A
B
Risk premiums
1.1
1.0
5%
SMB
-1.2
-2.0
HML
-1.0
-1.5
3%
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