CHAPTER 8
QUESTION 6: 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.
c The beta for the Chelle Computer Company.
QUESTION 8: As an equity analyst, you have develop the following return forecasts and risk estimates for two different stock mutual funds (Funds 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
(c) According to your analyss, are Funds T and U overvalued, undervalued, or properly.
QUESTION 10: 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
RATES OF RETURN
Period Rader Tire % Proxy Specific Index % True General Index
1 29 12 16
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 return for the market is 12 percent and for Rader Tire it is 11 percent, are superior results being obtained for ether index beta?
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