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?