An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 11%, the return on the SMB portfolio (rSMB) is 3.6%, and the return on the HML portfolio (rHML) is 5.4%. Risk free return 0%. . If ai = 0, bi = 1.2, ci = -0.4, and di = 1.3, what is the stock's predicted return? Round your answer to two decimal places.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Fama-French Three-Factor Model
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 11%, the return on the SMB portfolio (rSMB) is 3.6%, and the return on the HML portfolio (rHML) is 5.4%. Risk free return 0%. . If ai = 0, bi = 1.2, ci = -0.4, and di = 1.3, what is the stock's predicted return? Round your answer to two decimal places.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
