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Fama-French Three-Factor Model
An analyst has modeled the stock of a company using a Fama-French three-factor model. The risk-free rate is 4%, the market return is 10%, the return on the SMB portfolio (rSMB) is 3.6%, and the return on the HML portfolio (rHML) is 5.4%. If ai = 0, bi = 1.2, ci = - 0.4, and di = 1.3, what is the stock's predicted return? Round your answer to two decimal places.
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Time Value of Money calculations always use compound interest - You must adjust the interest rate and the number of periods to be consistent with compounding periods.
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Lastly plot the security market line (SML) for a market that has a risk free rate of 5% and a market risk premium of 7%. Make sure to label the x and y-axis as well as the risk-free rate and the market return on the SML.
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