Suppose equity returns can be explained by Fama-French’s three-factor model
E(R;) = Rp + Bmarket (E(RM) – Rp) + Bsize(SMB) + Bvalue (HML) = Assume there is no firm-specific risk. The information for each equity is presented here: Bmarket Bsize Bvalue Equity A 1.20 0.20 0.90 Equity B 0.80 -0.30 1.40 Equity C 0.95 1.50 -0.05
The risk premiums for the three factors are 5.5%, 4.9%, and 4.2%,
respectively. If you create a portfolio with 20% invested in A, 20% invested
in B, and the remainder in C, what is the expected return of your portfolio?
Assume that the risk-free rate is 5%.Show your calculation steps clearly.
respectively. If you create a portfolio with 20% invested in A, 20% invested
in B, and the remainder in C, what is the expected return of your portfolio?
Assume that the risk-free rate is 5%.Show your calculation steps clearly.
