1. The Fama-French 3 factor model is given by

E(R_i) = R_f + _M*(E(R_M) - R_f)+_SMB E(R_SMB)+ _HMLE(R_HML).

It is important to understand the interpretation of each beta.

Assume stock J has the following betas: _M = 1.20, _SMB = -0.2, _HML = -1.33. Which of the following statements is false?

Group of answer choices

A. Stock J would drop more than the overall stock market when the market gets into a recession.

B. Stock J is more likely to be a small stock than a large stock.

C. Stock J is more likely to be a growth firm than a value firm.

D. Both (A) and (B) are false.

2. Suppose Cokes stock is fairly priced and has the following information:

E[R_KO] = 7.8% and _KO = 0.8. And, the risk-free rate is 3%.

What is the market risk premium? ______%

Following question 2, suppose Apples stock has _AAPL of 1.4 and its stock has an actual return of 11.8%. Which of the following is true?

Group of answer choices

A. Based on the CAPM, Apples stock is also fairly priced.

B. Based on the CAPM, Apple is overpriced and its is -0.4%.

C. Based on the CAPM, Apple is underpriced and its is 0.4%

You want to use the following asset pricing models to determine the expected return on McDonalds stock.

• CAPM: _M = 0.48
• FF3 factor: _M = 0.40, _SMB = -0.41, _HML = 0.54

The info. of the risk-free rate and the risk factors are as follows:

• The risk-free interest rate is 3%.
• E(R_M) = 9.5%, E(R_SMB) = 2.5%, E(R_HML) = 6%

The expected return on McDonalds stock based on the FF3 factor model is 7.815,

Assume the average annual return on McDonalds stock is 7.5%, based on the CAPM, its alpha is 1.38.

Based on the FF3 factor model, what is its alpha? ______%

Food for thought: what does the FF3 factor model say about the valuation of McDonalds stock (underpriced, fairly priced, or overpriced)? Why is its conclusion different from the CAPM?