Question 10

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%

Assume the average annual return on McDonalds stock is 7.5%. Based on the CAPM, what is its alpha? ______%

Be careful: the beta to the market factor in the CAPM is slight different from the FF3 factor model.