Answer:
Stock return = 18.15%
Explanation:
As given:
Risk free rate = 3%
Market return = 11%
SMB = 4%
HML = 5.5%
Alpha = 0
Beta = 1.2
CiCi = -0.4
DiDi = 1.3
Computation:
Stock return can be calculated as follow:
Stock return = Risk free rate + Beta * (Market return - Risk free rate) + CiCi * SMB + DiDi * HML + Alpha
Stock return = 3% + 1.2 * (11% - 3%) + (-0.4) * 4% + 1.3 * 5.5% + 0
Stock return = 3% + 9.6% - 1.6% + 7.15% + 0
Stock return = 18.15%
Hence, Predicted stock return is 18.15%.
