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Muhammad shares his work with his supervisor, Aimee Blanchet. He tells her any security choices he makes for the growth portfolios will be based on

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Muhammad shares his work with his supervisor, Aimee Blanchet. He tells her any security choices he makes for the growth portfolios will be based on expected alpha calculations using the CAPM to estimate required return. After reviewing Exhibit 1 , Blanchet asks Muhammad why he doesn't forego the expected alpha calculations and simply add Slovenia Microdevices because of its higher expected return. Muhammad offers the following reasons for his approach: - Reason 1-Expected return estimates are subject to forecast error. - Reason 2-Security selection should consider the risk the security adds to the portfolio as well as return potential. - Reason 3-Evidence shows expected return estimates based on the CAPM are highly reliable. After listening to Muhammad's reasoning, Blanchet wonders if a different pricing model would yield different security choices. She asks Muhammad to repeat his analysis, but this time use the Fama-French 3-Factor Model to determine required return. She asks Muhammad to use the risk premia and risk-free data shown in Exhibit All the reasons Muhammad provides to Blanchet regarding the value of his initial approach are valid except Reason 1 Reason 2 Reason 3

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