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% - 21.0%

2 37.2 18.0

3 23.8 15.0

4 - 7.2 3.0

5 6.6 9.7

6 20.5 16.9

7 30.6 15.4

1. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Round your answer to two decimal places.

Beta =

1. 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. Round your answers to two decimal places.

Stock X NYSE

Average return % %

Standard deviation, % %

1. 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? Round your answer to two decimal places.

__________ %