Financial Risk Manager Part 1
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An analyst uses a three-factor model to evaluate the returns of stock BBZ. The factors are P, Q, and R. The analyst has the following information about three ETFs, each of which has a factor beta of 1 to that factor and a factor beta of 0 to all other factors. The analyst prepares the following information:
| | Factor P | Factor Q | Factor R |
|--------------------|----------|----------|----------|
| Expected annual return of ETF factor | 5.4% | 6.8% | 3% |
| Factor beta for stock BBZ | 0.95 | -0.40 | 1.20 |
If the annualized risk-free interest rate is 2.10% and stock BBZ has an alpha of 0.50%, what is the expected annual return on stock BBZ using the internal model?
An analyst uses a three-factor model to evaluate the returns of stock BBZ. The factors are P, Q, and R. The analyst has the following information about three ETFs, each of which has a factor beta of 1 to that factor and a factor beta of 0 to all other factors. The analyst prepares the following information:
| | Factor P | Factor Q | Factor R |
|--------------------|----------|----------|----------|
| Expected annual return of ETF factor | 5.4% | 6.8% | 3% |
| Factor beta for stock BBZ | 0.95 | -0.40 | 1.20 |
If the annualized risk-free interest rate is 2.10% and stock BBZ has an alpha of 0.50%, what is the expected annual return on stock BBZ using the internal model?
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