Problem 3 (10 points) As an equity analyst, you have developed the following return forecasts and risk

Fantastic news! We've Found the answer you've been seeking!

Question:

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(R_M) - 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?