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a. An analyst has modeled XYZ stock using the Fama & French three factor model (FF3FM)....

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 3.95%. Regression analysis shows that XYZ’s beta coefficient on SMB is 2.25 and on HML is -2.25. If the risk–free rate is 3.25%, the market risk premium is 7.50%, and XYZ’s market beta is 1.80, what is a fair rate of return on XYZ according to the FF3FM?

b. If you forecasted an expected return of 16.00% for stock XYZ, is it overvalued, undervalued, or fairly valued? Briefly, why?

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