AN INTRODUCTION TO ASSET PRICING MODELS

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 Celle computer and the general index.

c.       The beta for the Celle Computer Company.

 

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.

c. According to your analysts, are funds T and U overvalued, undervalued or properly valued?

 

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

c. If the current period return for the market is 12% and for Rader Tire it is 11%. Are superior results being obtained for either index beta?