Chapter 8: Problems 6(a-c), 8(a-c), and 10(a-c)
6. The following are the historic returns for the Chelle Computer Company:
Based on this information, compute the following: a. The correlation coefficient between Chelle Computer and the General Index. b. The standard deviation for the company and the index. c. The beta for the Chelle Computer Company. 8. As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U):
a. If the risk-free rate is 3.9 percent and the expected market risk premium (i.e., E(RM) − RFR) is 6.1 percent, calculate the expected return for each mutual fund according to the CAPM. b. Using the estimated expected returns from Part a along with your own return forecasts, demonstrate whether Fund T and Fund U are currently priced to fall directly on the security market line (SML), above the SML, or below the SML. c. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued?