10. As an equity analyst, you have developed the following return forecasts and risk esti- mates for two different stock mutual funds (Fund T and Fund U): Forecasted Return CAPM Beta Fund T 9.0% 1.20 Fund U 10.0 0.80 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 the SML. c. According to your analysis, are Funds T and U overvalued, undervalued, or properly valued? Given the following results, indicate what will happen to the beta for Sophie Fashion C0., relative to the market proxy, compared to the beta relative to the true market portfolio: YEARLY RATES OF RETURN Year Sophie Fashion (\"/o) Market Proxy (%) True Market (\"M l 10 8 6 2 20 14 11 3 14 10 7 4 20 18 12 5 15 12 10 Discuss the reason for the differences in the measured betas for Sophie Fashion Co. Does the suggested relationship appear reasonable? Why or why not? Draw the security market line for each of the following conditions: a. (1) RFR = 0.08; RM(proxy) = 0.12 (2) R2 = 0.06; RM(true) = 0.15 b. Rader Tire has the following results for the last six periods. Calculate and compare the betas using each index. RATES OF RETURN Rader Tire Proxy Specific Index True General Index Period (%) (%) (\"/o) 1 29 12 15 2 12 10 13 3 12 9 8 4 l7 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 horrnnf urn cnnm-im manna 1min" nhtainmi 'Fnr m'rl-mr I'nripv kph