The Market Return Is 10% and the Risk Free Rate

question 47

Multiple Choice

The market return is 10% and the risk free rate is 3%. Rascals Inc. has a market beta of 1.0, a SMB beta of −.60, and a HML beta of −0.85. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Rascal Inc. stock?

• A) 5.85%
• B) 7.10%
• C) 13.2%
• D) 15.3%

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Definitions:

Preferred Stock

A type of equity security that usually provides a fixed dividend prior to any dividend payments to common stockholders.

Treasury Stock

Shares of a company's own stock that it has repurchased or never issued to the public.

Asset Investment

The allocation of resources into physical or financial assets with the expectation of generating future returns.

Acquisitions

The process by which a company buys most or all of another firm's shares in order to take control.