1. We want to estimate the expected return of firm ABC using the CAPM and the FamaFrench 3-factor model. The risk-free rate is 0.5% and the expected excess return on the market is 5%.

a) You estimate that the market beta of ABC is 0.84. What is the expected return of ABC according to the CAPM?

b) Estimating the factor loadings for the Fama-French model, we find that for ABC mkt = 0.78, SMB = -0.15, and HML = 1.21. Given that the expected return on the SMB factor is 3.5%, and the expected return on the HML factor is 6.2%, what is the expected return of ABC according to the Fama-French 3-factor model?

c) Interpret the factor loadings of ABC. What does it mean to have mkt = 0.78, SMB = -0.15, and HML = 1.21?