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): Fund T Fund U Forecasted Return 9.0% 10.0 CAPM Beta 1.20 0.80 a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, 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, explain 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. Are Funds T and U overvalued, undervalued, or properly valued?
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): Fund T Fund U Forecasted Return 9.0% 10.0 CAPM Beta 1.20 0.80 a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, 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, explain 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. Are Funds T and U overvalued, undervalued, or properly valued?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 6P
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![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):
Fund T
Fund U
Forecasted Return
9.0%
10.0
CAPM Beta
1.20
0.80
a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, 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, explain 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. Are Funds T and U overvalued,
undervalued, or properly valued?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F18f7db55-03d0-46d8-b4d1-6c85e2a9bc71%2F6b2950e2-b947-4b15-8c52-dadb928a025b%2Fnn2h6ul_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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):
Fund T
Fund U
Forecasted Return
9.0%
10.0
CAPM Beta
1.20
0.80
a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, 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, explain 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. Are Funds T and U overvalued,
undervalued, or properly valued?
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