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You have been assigned the task of estimating the expected returns for three different stocks

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3. You have been assigned the task of estimating the expected returns for three different stocks:… 1 answer below » 3.     You have been assigned the task of estimating the expected returns for three different  stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your cal- culations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: λMKT = 7.5%, λMACRO1 = −0.3%, and λMACRO2 = 0.6%. You have also estimated the follow- ing factor betas (i.e., loadings) for View complete question » 3.     You have been assigned the task of estimating the expected returns for three different  stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your cal- culations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: λMKT = 7.5%, λMACRO1 = −0.3%, and λMACRO2 = 0.6%. You have also estimated the follow- ing factor betas (i.e., loadings) for all three stocks with respect to each of these potential   risk factors: FACTOR  LOADING Stock MKT MACRO1 MACRO2 QRS 1.24 −0.42 0.00 TUV 0.91 0.54 0.23 WXY 1.03 −0.09 0.00 a.    Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. b.    Calculate the expected returns for the three stocks using all three risk factors and the  same 4.5% risk-free rate. c.    Discuss the differences between the expected return estimates from the single-factor model and those from the multifactor  model. Which estimates are most likely to be   more useful in practice? d.    What sort of exposure might MACRO2 represent? Given the estimated factor betas, is it really reasonable to consider it a common (i.e., systematic) risk  factor? View less » Dec 29 2015 10:57 AM


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