Problem 7-06

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	10.0	%	1.30
Fund U	13.0		0.90

Using only the data shown in the preceding table:

1. If the risk-free rate is 4.3 percent and the expected market risk premium (i.e., E(R_M) RFR) is 7.5 percent, calculate the expected return for each mutual fund according to the CAPM. Round your answers to two decimal places.

   Fund T: %

   Fund U: %

2. Choose the correct SML graph. Note that labels with asterisk denote estimated returns.

   The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 3 .

3. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued?

   Fund	Evaluation
   T	-Select-OvervaluedProperly valuedUndervaluedItem 4
   U	-Select-OvervaluedProperly valuedUndervaluedItem 5