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:
The correlation coefficient between Chelle Computer and the General Index.
The standard deviation for the company and the index.
The beta for the Chelle Computer Company.
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):
FORCASTED RETURN CAPM BETA
Fund T 9.0% 1.20
Fund U 10 0.80
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.
Using the estimated expected returns from 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.
According to your analysis, are Funds T and U overvalued, undervalued, or properly valued?
Draw the security market line for each of the following conditions:
(1)RFR =0.08; RM(proxy) = 0.12
(2) Rz = 0.06; RM(true) = 0.15
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 percent and for Rader Tire it is 11 percent, are superior results being obtained for either index beta?
You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: λMKT = 7.5%, λMACRO1 = −0.3%, and λMACRO2 = 0.6%. You have also estimated the following factor betas (i.e., loadings) for all three stocks with respect to each of these potential risk factors:
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