Question
1.) An analyst has modeled XYZ stock using the Fama & French three factor model (FF3FM).Over the past few years the risk premium on SMB
1.) 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 3.50%.Regression analysis shows that XYZ's beta coefficient on SMB is -2.50 and on HML is -1.95.If the risk-free rate is 3.25%, the market risk premium is 6.75%, and XYZ's market beta is 1.75, what is a fair rate of return on XYZ according to the FF3FM?
2.) 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Crafting and Executing Strategy The Quest for Competitive Advantage
Authors: Arthur Thompson, Margaret Peteraf, John Gamble, A. J. Strickland III
19th edition
78029503, 978-0078029509
