Problem 3 (10 points) As an equity analyst, you have developed the following return forecasts and risk
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Problem 3 (10 points) 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
9.00%
1.20
Fund U
10.00%
0.80
3.a. (6 points) If the risk-free rate (RFR) is 3.9% and the expected market risk premium (i.e., E(RM) - RFR) is 6.1%, calculate the expected return for each mutual fund according to the CAPM.
3.b. (4 points) Decide which fund is overvalued, undervalued or properly valued and explain why?
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