a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta

Question:

a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient.

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.

c. Assuming (1) that the situation during Years 1 to 7 is expected to hold true in the future (that is, rX = rX rM = rM; and both oX and bX in the future will equal their past values), and (2) that Stock X is in equilibrium (that is, it plots on the Security Market Line), what is the risk-free rate?

d. Plot the Security Market Line.

e. Suppose you hold a large, well-diversified portfolio and are considering adding to the portfolio either Stock X or another stock, Stock Y, that has the same beta as Stock X but a higher standard deviation of returns. Stocks X and Y have the same expected returns; that is rX = rY = 10.6%. Which stock should you choose?

HISTORICAL RATES OF RETURN Year NYSE Stock X (26.5%) 37.2 1 (14.0%) 23.0 23.8 17.5 4 (7.2) 2.0 S.1 6.6 20.5 19.4 30.6 18

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