Suppose the model is true. The T-bill rate is 2%. We forecast the market return(rm) to be 8%, the size portfolio return(r smb) to be 3%, and the book-to marktet portfolio return(r HML) to be 4% for the next month. What is the model implied exepected return for security D for the next month?

1. CAPM and Multifactor Models (18 points) Consider the following Fama-French (FF) three factor model: ro - r = 0p + Borm-rp) + BSMBSMB +BHMLHmL +ep. where a security D's monthly excess return is regressed on three benchmark factors. The regression output is numbers in the parentheses are standard errors): Regression output Estimate Correlation coefficient 0.83 R-square 0.68 Residual SD = Regression SE (%) 5.33 0.19 (0.68) Alpha = Intercept (%) Market beta 1.34 (0.18) -1.11 (0.31) SMB (size) beta HML (book to market) beta 0.19 (0.28)