1.) 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 3.50%. Regression analysis shows that XYZ's beta coefficient on SMB is -2.50 and on HML is -1.95. If the risk-free rate is 3.25%, the market risk premium is 6.75%, and XYZ's market beta is 1.75, what is a fair rate of return on XYZ according to the FF3FM?
2.) Using the data from problem 1, if you forecasted an expected return of 16.00% for stock XYZ, is it overvalued, undervalued, or fairly valued? Briefly, why?