Question # 2: Ch10- APT [25 points] (30 pts) Suppose that the stock market can be described by the Fama and French (1993

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Question 2 Ch10 Apt 25 Points 30 Pts Suppose That The Stock Market Can Be Described By The Fama And French 1993 1 (49.52 KiB) Viewed 32 times

Question # 2: Ch10- APT [25 points] (30 pts) Suppose that the stock market can be described by the Fama and French (1993) factors. The factor risk premiums are in the following table: Portfolio Market index SMB HML Risk premium 0.027 0.062-0.066 According to the APT the expected return on a stock is given by the following equation: E(r)=r+ BiMRM + BISMBSMB + BiHML HML You want to make an analysis on Apple Inc. stock return. The regression result of Apple daily return data (Jan '18 - Jun '18, 125 observations) on the above factors is on the following table: Coefficient P-value Constant 0.0184 0.8478 Market. 1.0082 0.000 SML -0.0711 0.7273 HML -0.7147 0.0039 R² 0.54 Risk free rate in the economy is 0.006. Apple's risk premium is 0.0836 (a) What sort of firm does the firm issuing this security seem to be? (5marks) (b) Find the cost of capital of Apple if Fama-French 3-factor model holds (ignore p-values). (5 marks) (c) Is Apple fairly priced according to FF3? (5 marks) (d) In what percentage does the above model explain the variation of Apple daily stock returns? (5 marks) (e) Are there any statistically insignificant factors from the regression result? What would be the expected return and alpha of Apple if you exclude those factors from the analysis? (5 marks)