Chapter 29 problem 18

Characteristic Line and SML

You are given the following set of data:

HISTORICAL RATES OF RETURN Year NYSE Stock ABC 1 (26.7 %) (14.5 %) 2 37.9 24.4 3 23.6 18.3 4 (8.2 ) 3.7 5 7.1 7.9 6 21.0 20.6 7 31.6 18.2

Choose the correct graph which helps to estimate the value of the beta coefficient by eye.

The correct graph is -Select-ABCDItem 1 . Determine the arithmetic average rates of return for Stock ABC and the NYSE over the period given. Calculate the standard deviations of returns for both Stock ABC and the NYSE. Do not round intermediate calculations. Round your answers to one decimal place.

Stock ABC Market Portfolio Average return, % % Standard deviation, % %

Assuming: (1) that the situation during Years 1 to 7 is expected to hold true in the future (that is, = , = , and both ABC and bABC in the future will equal their past values) and (2) that Stock ABC is in equilibrium (that is, it plots on the SML), what is the implied risk-free rate? Do not round intermediate calculations. Round your answer to one decimal place.

% Choose the correct graph for the security market line.

The correct graph is -Select-ABCDItem 7 . Suppose you hold a large, well-diversified portfolio and are considering adding to the portfolio either Stock ABC or another stock, Stock Y, that has the same beta as Stock ABC but a higher standard deviation of returns. Stocks ABC and Y have the same expected returns; that is = = 11.2%. Which stock should you choose?

In theory, you should -Select-choose Stock Xchoose Stock Ybe indifferent between the two stocksItem 8 as far as -Select-Stock X would be represented by a higher point on the SML than Stock YStock Y would be represented by a higher point on the SML than Stock Xthe two stocks would be represented by a single point on the SMLItem 9 .