Hi Santosh, Thanks for asking this.
The difference is between the expected return and the actual or empirical estimate return.
While the Fama French 3 factor model is a conceptual model this interce
Hi Santosh, Thanks for asking this.
The difference is between the expected return and the actual or empirical estimate return.
While the Fama French 3 factor model is a conceptual model this intercept is the alpha (Think of as Jensen’s Alpha) that can be over or under the predicted or expected return. Since the question gives intercept or alpha, we are asked to assume the manager has that excess return on top of the three-factor model. Hence it is included while calculating the Required rate of return.ย Hope this helps.
Madhusudan Chandarasekaran, CFA, FRM