AN INTRODUCTION TO ASSET PRICING MODELS

| March 14, 2016

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?

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