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As a security analyst for the New York branch of Deutsche Bank, you have identified the following factors and factor sensitivities for Amazon.com: r = µ + βMFM + βSMBFSMB + βHMLFHML.
Amazon.com's factor sensitivities in dollars are
Factors Betas
FM market factor (rM - µM) βM = +1.00 FSMB firm size factor (small minus big stock returns) βSMB = +0.10
FHML relative financial distress (value minus growth stock returns)
βHML = +0.05
Amazon.com's expected return is µ = 10 percent if all factors are equal to their expectation.
a. What is Amazon.com's expected return in a year when each factor is 1 percent lower than its expectation?
b. If Amazon.com's stock price rises by 12 percent during this period, by how much does Amazon.com over- or underperform its expectation?
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