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b. 6. Consider the Fama-French (1993) three-factor model: Fa- rA = aj + Bim (Rmt – rt) + BiSMB, + BiHML, + it %3D where Rmes SMB;, and HML, are the market, book-market, and size factors, respectively. To analyze one stock, you run the above regression on the three factors and obtain a;= 1%, Bm= 0.9, Bi,= 0.3, and 3;,= 0.2. Assume that the market beta is the same if you get it from either the CAPM or the three-factor regression. (In practice, the values are close.) Suppose that the risk-free interest rate is 3%, and that the market, book- market, and size premiums are 12%, 5%, and 6%, respectively. a. What is the required rate of return on the stock if you believe the CAPM to be an accurate descriptor? b. What would your answer be if believed the three-factor model were a more nearly accurate descriptor? C. What would your answer be if you do not believe factor models are valid? you your you

b. 6. Consider the Fama-French (1993) three-factor model: Fa- rA = aj + Bim (Rmt – rt) + BiSMB, + BiHML, + it %3D where Rmes SMB;, and HML, are the market, book-market, and size factors, respectively. To analyze one stock, you run the above regression on the three factors and obtain a;= 1%, Bm= 0.9, Bi,= 0.3, and 3;,= 0.2. Assume that the market beta is the same if you get it from either the CAPM or the three-factor regression. (In practice, the values are close.) Suppose that the risk-free interest rate is 3%, and that the market, book- market, and size premiums are 12%, 5%, and 6%, respectively. a. What is the required rate of return on the stock if you believe the CAPM to be an accurate descriptor? b. What would your answer be if believed the three-factor model were a more nearly accurate descriptor? C. What would your answer be if you do not believe factor models are valid? you your you

Essentials Of Investments
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
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b. 6. Consider the Fama-French (1993) three-factor model: Fa- rA = aj + Bim (Rmt – rt) + BiSMB, + BiHML, + it %3D where Rmes SMB;, and HML, are the market, book-market, and size factors, respectively. To analyze one stock, you run the above regression on the three factors and obtain a;= 1%, Bm= 0.9, Bi,= 0.3, and 3;,= 0.2. Assume that the market beta is the same if you get it from either the CAPM or the three-factor regression. (In practice, the values are close.) Suppose that the risk-free interest rate is 3%, and that the market, book- market, and size premiums are 12%, 5%, and 6%, respectively. a. What is the required rate of return on the stock if you believe the CAPM to be an accurate descriptor? b. What would your answer be if believed the three-factor model were a more nearly accurate descriptor? C. What would your answer be if you do not believe factor models are valid? you your you
Transcribed Image Text:b. 6. Consider the Fama-French (1993) three-factor model: Fa- rA = aj + Bim (Rmt – rt) + BiSMB, + BiHML, + it %3D where Rmes SMB;, and HML, are the market, book-market, and size factors, respectively. To analyze one stock, you run the above regression on the three factors and obtain a;= 1%, Bm= 0.9, Bi,= 0.3, and 3;,= 0.2. Assume that the market beta is the same if you get it from either the CAPM or the three-factor regression. (In practice, the values are close.) Suppose that the risk-free interest rate is 3%, and that the market, book- market, and size premiums are 12%, 5%, and 6%, respectively. a. What is the required rate of return on the stock if you believe the CAPM to be an accurate descriptor? b. What would your answer be if believed the three-factor model were a more nearly accurate descriptor? C. What would your answer be if you do not believe factor models are valid? you your you
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