Problem 7-06 As an equity analyst, you have developed the following return forecasts and risk estimates...

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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 Fund T Fund U 7.0% 10.0 Using only the data shown in the preceding table: CAPM Beta 1.40 0.70 a. If the risk-free rate is 3.1 percent and the expected market risk premium (i.e., E(R) -RFR) is 6.1 percent, calculate the expected return for each mutual fund according to the CAPM. Round your answers to two decimal places. Fund T: Fund U: b. Choose the correct SML graph. Note that labels with asterisk denote estimated returns. The correct graph is -Select- . A. E[R Rm E(R) 0.18- 0.16 0.18 0.16+ 0.143 0.1 Security market Line 0.00 Fund U 0.04 0.02+ 0.2 0.4 Security market Line Rm 0.12 0.17 *Fund U 0.00- Fund 0.06+ 0.04 0.02 E(R) 0.18 0.16 0.141 Rm 0.12 0.13 0.00+ -0.06- 0.04+ E(Ri) 0.10+ 0.16 0.6 0.8 Security market Line 0.2 0.4 0.6 0.8 *Fund T Security market Line SML 116 1.8 2 Beta SML 1.6 Betali 0.14+ 0.12 Rm 0.1 Fu 0.00+ "Fund T 0.06 0.04 0.02 0.2 0.4 0.6 0.8 SML 1.6 1.8 Beta c. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued? Fund Evaluation -Select- -Select- SML Betal 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 Fund T Fund U 7.0% 10.0 Using only the data shown in the preceding table: CAPM Beta 1.40 0.70 a. If the risk-free rate is 3.1 percent and the expected market risk premium (i.e., E(R) -RFR) is 6.1 percent, calculate the expected return for each mutual fund according to the CAPM. Round your answers to two decimal places. Fund T: Fund U: b. Choose the correct SML graph. Note that labels with asterisk denote estimated returns. The correct graph is -Select- . A. E[R Rm E(R) 0.18- 0.16 0.18 0.16+ 0.143 0.1 Security market Line 0.00 Fund U 0.04 0.02+ 0.2 0.4 Security market Line Rm 0.12 0.17 *Fund U 0.00- Fund 0.06+ 0.04 0.02 E(R) 0.18 0.16 0.141 Rm 0.12 0.13 0.00+ -0.06- 0.04+ E(Ri) 0.10+ 0.16 0.6 0.8 Security market Line 0.2 0.4 0.6 0.8 *Fund T Security market Line SML 116 1.8 2 Beta SML 1.6 Betali 0.14+ 0.12 Rm 0.1 Fu 0.00+ "Fund T 0.06 0.04 0.02 0.2 0.4 0.6 0.8 SML 1.6 1.8 Beta c. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued? Fund Evaluation -Select- -Select- SML Betal