Principles of Corporate Finance_ 12th Edition

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Chapter 8 Portfolio Theory and the Capital Asset Pricing Model 217

21. APT The following table shows the sensitivity of four stocks to the three Fama–French
    factors. Estimate the expected return on each stock assuming that the interest rate is 2%, the
    expected risk premium on the market is 7%, the expected risk premium on the size factor is
    3.5%, and the expected risk premium on the book-to-market factor is 4.8%.

Market

Return

Return on

Size Factor

Return on Book-

to-Market Factor

Interest

Rate

1999 20.6% 15.3% –34.2% 4.7%

(^2000) – 17.5 –1.5 39.5 5.9
(^2001) – 15.2 18.6 18.7 3.8
(^2002) – 22.8 3.6 10.5 1.7
2003 30.8 27.8 4.9 1.0
2004 10.7 5.1 9.8 1.2
2005 3.1 –2.3 9.1 3.0
2006 10.6 0.3 14.3 4.8
2007 1.1 –8.1 –12.2 4.7
2008 – 38.4 3.8 1.0 1.6
Boeing Campbell Soup Dow Chemical Apple
Market 1.13 0.51 1.51 1.08
Size –0.49 –0.60 0.28 –0.57
Book-to-market –0.05 0.25 0.13 –0.074
CHALLENGE

22. Fund Performance Between 1999 and 2008, the returns on Microfund averaged 4% a year.
    In his 2008 discussion of performance, the fund president noted that this was nearly 6% a
    year better than the return on the U.S. market, a result that he attributed to the fund’s strategy
    of buying only stocks with outstanding management.
    The following table shows the returns on the market, the size and book-to-market factors,
    and the interest rate during this period:

The fund had marketed itself as a way to invest in small and medium-sized stocks, and this

was reflected in a beta relative to the size factor of 1.1. It had also traditionally adopted a

conservative approach to risk with an estimated market beta of .7. The fund’s beta relative

to the book-to-market factor was –.2. Evaluate the performance of the fund during this

period.

23. Minimum-risk portfolio In footnote 4 we noted that the minimum-risk portfolio con-
    tained an investment of 90.2% in Johnson & Johnson and 9.8% in Ford. Prove it. (Hint: Yo u
    need a little calculus to do so.)


24. Efficient portfolios Look again at the set of the three efficient portfolios that we calculated
    in Section 8-1.
    a. If the interest rate is 5%, which of the three efficient portfolios should you hold?
    b. How would your answer to (a) change if the interest rate were 2%?