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):

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.
b. 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 theSML.

  • CreatedDecember 17, 2014
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