Problem 3-5 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%		- 12.0%
2		37.2		22.0
3		23.8		19.0
4		- 7.2		2.0
5		6.6		11.4
6		20.5		17.7
7		30.6		15.2

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 = ______

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,		______ %	_____	%

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. _________ %