Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Part A: An analyst has modeled XYZ stock using the Fama & French three factor model (FF3FM). Over the past few years the risk premium

Part A: 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 XYZs beta coefficient on SMB is -2.50 and on HML is -1.95. If the riskfree rate is 3.25%, the market risk premium is 6.75%, and XYZs market beta is 1.75, what is a fair rate of return on XYZ according to the FF3FM?

Part B: 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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

American Public School Finance

Authors: William A. Owings, Leslie S. Kaplan

3rd Edition

113849996X, 978-1138499966

More Books

Students also viewed these Finance questions

Question

Have you got a one page summary that you are happy with?

Answered: 1 week ago