Question # 2: Ch10- APT [25 points] (30 pts) Suppose that the stock market can be described by the Fama and French (1993) factors. The factor risk premiums are in the following table: Portfolio Market index SMB HML Risk premium 0.027 0.062-0.066 According to the APT the expected return on a stock is given by the following equation: E(r)=r+ BMRM + PSMBSMB + BHML HML You want to make an analysis on Apple Inc. stock return. The regression result of Apple daily return data (Jan '18 - Jun '18, 125 observations) on the above factors is on the following table: Coefficient P-value Constant 0.0184 0.8478 Market 1.0082 0.000 SML -0.0711 0.7273 HML -0.7147 00039 R 0.54 Risk free rate in the economy is 0.006. Apple's risk premium is 0.0836 (a) What sort of firm does the firm issuing this security seem to be? (5marks) (b) Find the cost of capital of Apple if Fama-French 3-factor model holds (ignore p-values). (5 marks) (c) Is Apple fairly priced according to FF3