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?