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Characteristics of the merged company

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Suppose that assets are priced according to the Fama-French 3-factor model. Consider threeThe risk-free rate is 2% small firms: A, B and C. Assume that their risk characteristics are the same but otherwise the three firms are unrelated. In particular,Factor-betas A B C βM 1/2 1/2 1/2βHML -1/2 -1/2 -1/2 βSMB 1 1 1Risk premia on the market, HML and SMB factors are 6%, 7% and 5% respectively.

(a) Suppose that the three firms decide to merge and each will be operated as an independentunit of the merged company. What are risk characteristics of the merged company and its risk premium?

(b) Are the dynamics of the merged company consistent with the prediction of the FF model?

Reference no: EM133060481

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