Question

The market return is 12% and the risk free rate is 4%. Smallish Inc. Has a market beta of 0. 9, a SMB beta of 0. 65, and a HML beta of. 52. The risk premium on HML and SMB are both 2%. If the single factor model generates a regression coefficient of 0. 8, using the Fama-French Three Factor Model, what is the different in returns between the Three-Factor model and the single factor model expected returns on Smallish Inc. Stock

Answer 1

The difference in returns between the Three-Factor model and the single factor model is mathematically given as

R= 13.54%

What is the difference in returns between the Three-Factor model and the single factor model expected returns on Smallish Inc. Stock?

Question Parameters:

The market return is 12% and the risk free rate is 4%. Smallish Inc. Has a market beta of 0. 9, '

a SMB beta of 0. 65, and a HML beta of. 52.

The risk premium on HML and SMB are both 2%.

a regression coefficient of 0. 8,

Generally, the equation for the Return  is mathematically given as

Return = Rf + beta x (Rm - Rf) + beta x SMB + beta x HML

R= 4% + 0.9 (12%-4%) + 0.65 (2%) + 0.52 (2%)

R= 13.54%

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