1. The following are historic returns for the Chelle Computer Company.
Year Chelle 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.
b. The standard deviation for the company and the index.
c. The beta for the Chelle Computer Company
2. 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. Using the 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), or below the SML.
c. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued?
3. Draw the security market line for each of the following conditions:
a. (1) RFR = 0.08; RM (proxy) = 0.12
(2) RZ = 0.06; RM (true) = 0.15
b. Rader Tire has the following results for the last six periods. Calculate and compare the beats using each index.
RATES OF RETURN
Rader Tire Proxy Specific Index True General Index
Period (%) (%) (%)
1 29 12 15
2 12 10 13
3 -12 -9 -8
4 17 14 18
5 20 25 28
6 -5 -10 0
c. If the current period for the market is 12 percent and for Radar Tire it is 11 percent, are superior results being obtained for either index beta?
Attachment:- Portfolio Management.docx