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HW10 Q9 You want to use the following asset pricing models to determine the expected return...

HW10 Q9 You want to use the following asset pricing models to determine the expected return on McDonald’s stock.

  • CAPM: βM = 0.48
  • FF3 factor: βM = 0.40, βSMB = -0.41, βHML = 0.54

The info. of the risk-free rate and the risk factors are as follows:

  • The risk-free interest rate is 3%.
  • E(RM) = 9.5%, E(RSMB) = 2.5%, E(RHML) = 6%

What is the expected return on McDonald’s stock based on the FF3 factor model? ______%

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Answer #1

Expected return=risk free rate+betam*(Rm-rf)+betasmb*rsmb+betahml*rhml=3%+0.40*(9.5%-3%)-0.41*2.5%+0.54*6%=7.815%

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