A: An analyst has modeled XYZ stock using the Fama & French three-factor model (FF3FM). Over the past few years the risk premium on SMB was 2.75% and the risk premium on HML was 3.95%. Regression analysis shows that XYZ’s beta coefficient on SMB is 2.25 and on HML is -2.25. If the risk–free rate is 2.95%, the market risk premium is 7.25%, and XYZ’s market beta is 1.80, what is a fair rate of return on XYZ according to the FF3FM?

Part B: Using the data from problem 1, if you forecasted an expected return of 16.00% for stock XYZ, is it overvalued, undervalued, or fairly valued? Briefly, why?

Answer rating: 100% (QA)

Answer According to FF3FM Model Fair Rate of Return r is r R f B 3 K m R ... View the full answer