You are given the following set of data: HISTORICAL RATES OF RETURN Year NYSE Stock X 1 - 26.5% - 25.0% 2 37.2 24.0 3 23.8 10.5 4 - 7.2 4.0 5 6.6 8.1 6 20.5 17.1 7 30.6 17.2 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 bx 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. % Plot the Security Market Line. Select the correct graph. 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: = = 10.6% . Which stock should you choose ?

2 and 3 Risk and Return 3-4: The Capital Market Line and the Security Market Line 3-5: Calculating Beta Coefficients Problem Walk-Through Problem 3-5 Characteristic Line and Security Market Line You are given the following set of data: HISTORICAL RATES OF RETURN Year Stock X - 26.5% - 25.0% 24.0 23.8 10.5 37.2 a u WN 4.0 NO 8.1 17.1 30.6 17.2 a. 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 = .7575 b. 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, 1 Aug 15.891 % 7.986 -15.99: % 3% Standard deviation, 16.506 3 Type here to search C. Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., fx = TX, Average fm = FM Average, and both Ox and bx 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. *% d. Plot the Security Market Line. Select the correct graph. -0.55 0.5 1 1.5 2 2.5 3 3.5 4 Beta Type here to search o i 9 sk and Return -0.551 0.5 1 1.5 2 2.5 3 3.5 4 Beta -0.55 0.5 1 1.5 2 2.5 3 3.5 4 Beta The correct graph is D e. 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: fx = fy = 10.6%. Which stock should you choose