Assignment:
Corporate Investment Analysis - in FINANCE. Reilly, F., & Brown, K. (2012). Investment analysis and portfolio management (10th ed.). Mason, OH: South-Western/ Cengage Learning. Book used by Strayer University.
Problem 1: 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.
b) Using the estimated expected returns for Part a along with your own return forecasts, demonstrate 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.
c) According to your analysis, the Funds T and U overvalued, undervalued, or properly valued?
Problem 2: 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
b) Rader Tire has the following results for the last six periods. Calculate and compare the betas using each index.
RATES OF RETURN
|
Period
|
Rader Tire
(%)
|
Proxy Specific Index (%)
|
True General Index (%)
|
|
1
|
29
|
12
|
15
|
|
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% and for Rader Tire it is 11%, are superior results being obtained for either index beta?