Characteristic Line and Security Market Line You are given the following set of data Historical Rates of Return Year NYSE Stock X 1 26 5 20 0 2 37 2 23 0 3 23 8 15 0 4 7 2 4 0 5 6 6 8 7 6 20 5 16 1 7 30 6 17 0 Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient Do not round intermediate calculations Round your answer to two decimal places Determine the arithmetic average rates of return for Stock X and the NYSE over the period given Calculate the standard deviations of returns for both Stock X and the NYSE Do not round intermediate calculations Round your answers to two decimal places Stock X NYSE Average return, Standard deviation, Assume that the situation during Years 1 to 7 is expected to prevail in the future (i e , and both x and b x in the future will equal their past values) Also assume that Stock X is in equilibrium that is, it plots on the Security Market Line What is the risk free rate Do not round intermediate calculations Round your answer to two decimal places Choose the correct graph of the Security Market Line The correct graph is Suppose you hold a large, well diversified portfolio and are considering adding to that portfolio either Stock X or another stock, Stock Y, which has the same beta as Stock X but a higher standard deviation of returns Stocks X and Y have the same expected returns 9 1 Which stock should you choose In theory, you should choose Stock X choose Stock Y or be indifferent between the two stocks as far as Stock X would be represented by a higher point on the SML than Stock Y Stock Y would be represented by a higher point on the SML than Stock X or the two stocks would be represented by a single point on the SML

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Characteristic Line and Security Market Line You are given the following set of data: Historical Rates of Return Year NYSE Stock X 1 -26.5% -20.0%

Characteristic Line and Security Market Line

You are given the following set of data:

	Historical Rates of Return
Year	NYSE	Stock X
1	-26.5%	-20.0%
2	37.2	23.0
3	23.8	15.0
4	-7.2	4.0
5	6.6	8.7
6	20.5	16.1
7	30.6	17.0

Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Do not round intermediate calculations. Round your answer to two decimal places. ________
Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. Do not round intermediate calculations. Round your answers to two decimal places.

Stock X NYSE

Average return, % %

Standard deviation, % %
Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., and both _x and b_x in the future will equal their past values). Also assume that Stock X is in equilibrium - that is, it plots on the Security Market Line. What is the risk-free rate? Do not round intermediate calculations. Round your answer to two decimal places.

________ %
Choose the correct graph of the Security Market Line.

The correct graph is _______.
Suppose you hold a large, well-diversified portfolio and are considering adding to that portfolio either Stock X or another stock, Stock Y, which has the same beta as Stock X but a higher standard deviation of returns. Stocks X and Y have the same expected returns: = = 9.1%. Which stock should you choose?
In theory, you should choose Stock X ? choose Stock Y? or be indifferent between the two stocks as far as Stock X would be represented by a higher point on the SML than Stock Y? Stock Y would be represented by a higher point on the SML than Stock X? or the two stocks would be represented by a single point on the SML.