You are researching two mutual funds, LOW and HIGH. You estimate expected returns for the up-coming year to be 3% for LOW and 21% for HIGH.  LOW fund invests only in government bonds (risk-free) which it holds to maturity, meaning that LOW’s return for the up-coming year is known in advance. HIGH invests in risky securities that give its returns a standard deviation of 64%.   

To better gauge HIGH’s risk, you ran the CAPM regression on some recent historical data:

                                                            r_HI  –  r_f    =   α  +  β ( r_M  –  r_f)  +  ε

which generated the following results:

Regression Statistics
R Square	0.263
Observations	120

 

	Coefficient	t Stat
Intercept	???	0.775
(rM  –  rf)	2.050	4.235

You estimate the expected return on the market portfolio to be 11% with standard deviation of 16%.

1. Does the HIGH fund lie above, on, or below the Security Market Line?  If off, by how much?
2. Is HIGH over, under, or fairly-priced according to the CAPM?