Question
You want to use the following asset pricing models to determine the expected return on McDonald's stock. CAPM: M= 0.48 FF3 factor: M= 0.40, SMB=
You want to use the following asset pricing models to determine the expected return on McDonald's 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(RM) = 9.5%, E(RSMB) = 2.5%, E(RHML) = 6%
What is the expected return on McDonald's stock based on the FF3 factor model? ______%
Based on the FF3 factor model, what is its alpha? ______%
Food for thought: what does the FF3 factor model say about the valuation of McDonald's stock (underpriced, fairly priced, or overpriced)? Why is its conclusion different from the CAPM?
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Intermediate Financial Management
Authors: Brigham, Daves
10th Edition
978-1439051764, 1111783659, 9780324594690, 1439051763, 9781111783655, 324594690, 978-1111021573
