Excel Online Structured Activity: 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%		- 17.0%
2		37.2		24.0
3		23.8		18.5
4		- 7.2		3.0
5		6.6		10.8
6		20.5		19.6
7		30.6		18.6

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. 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.

   Beta =

2. 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.

   		NYSE		Stock X
   Average return,		%		%
   Standard deviation,		%		%

3. 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.

   %

4. Plot the Security Market Line.

   Select the correct graph.

   The correct graph is _________graph Agraph Bgraph Cgraph D

   A.	r(%) Beta Security Market Line
   B.	r(%) Beta Security Market Line
   C.	r(%) Beta Security Market Line
   D.	r(%) Beta Security Market Line

5. 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: = = 10.6% . Which stock should you choose?

   ___XY.

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