The following are the historic returns for the Chelle Computer Company:
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.
b. The beta for the Chelle Computer Company
CHAPTER 8 – 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. 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?