Question 4 Consider the Fama and French three-factor model. The table below summarizes the betas...
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Question 4 Consider the Fama and French three-factor model. The table below summarizes the betas of a stock with respect to the three factors, as well as the estimated factor risk premia. T-Bills currently offer a 2% yield. Factor Beta Factor Risk Premium Market 0.7 10% SMB -0.5 5% HML 1.2 7% a) How would you interpret the negative beta on the SMB factor and the positive beta on the HML factor? [5 marks] b) Compute the expected return on the stock based on the Fama-French three-factor model. (8 marks)
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