homework week 4
Chapter 8
Problem 6
The following are the historic returns for the Chelle Computer Company:
Year Chelle Computer General Index
Year chelle computer general index 1 37 15 2 9 13 3 -11 14 4 8 -9 5 11 12 6 4 9
Based on this information, compute the following:
a. The correlation coefficient between Chelle Computer and the General Index.
Answer : r= .1305
b. The standard deviation for the company and the index
Answer: sd of company= 14.209, sd of index= 8.266
c. The beta for the Chelle Computer Company
Answer: beta= .00759
Problem 8
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): Forecasted Return CAPM Beta Fund T 9.0% 1.20 Fund U 10.0% 0.80
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. 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 overvlued, undervalued or properly valued?
CAPM and the SML
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):
Forecasted Return CAPM
Beta
Fund T 9.0 1.20
Fund U 10.0 .80
a). If the risk-free rate is 3.9% and the expected market risk premium (i.e., E(RM) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the CAPM.
b). Using the estimated expected returns for Part
Problem 6
The following are the historic returns for the Chelle Computer Company:
Year Chelle Computer General Index
Year chelle computer general index 1 37 15 2 9 13 3 -11 14 4 8 -9 5 11 12 6 4 9
Based on this information, compute the following:
a. The correlation coefficient between Chelle Computer and the General Index.
Answer : r= .1305
b. The standard deviation for the company and the index
Answer: sd of company= 14.209, sd of index= 8.266
c. The beta for the Chelle Computer Company
Answer: beta= .00759
Problem 8
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): Forecasted Return CAPM Beta Fund T 9.0% 1.20 Fund U 10.0% 0.80
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. 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 overvlued, undervalued or properly valued?
CAPM and the SML
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):
Forecasted Return CAPM
Beta
Fund T 9.0 1.20
Fund U 10.0 .80
a). If the risk-free rate is 3.9% and the expected market risk premium (i.e., E(RM) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the CAPM.
b). Using the estimated expected returns for Part