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Problem $7-07$

Choose the correct security market line graph for each of the following conditions:

$(1)$ RFR $=0\mathrm{.}06$; RM$($proxy$)=0\mathrm{.}14$

$(2)$ Rz $=0\mathrm{.}04$; RM$($true$)=0\mathrm{.}16$

The correct graph is

$-$Select$-$

$.$

A$.$

The graph titled Security Market Line shows the relationship between the expected rate of return on an asset and its systematic risk, as measured by beta. The horizontal axis labeled Beta ranges from $0$ to $2.$ The vertical axis labeled Rate of Return ranges from $0$ to $0\mathrm{.}2.$ There are two lines in the graph. The S M L proxy line passes through $(0,0\mathrm{.}06)$ and $(2,0\mathrm{.}22).$ The S M L true line passes through $(0,0\mathrm{.}04)$ and $(2,0\mathrm{.}28).$

B$.$

The graph titled Security Market Line shows the relationship between the expected rate of return on an asset and its systematic risk, as measured by beta. The horizontal axis labeled Beta ranges from $0$ to $2.$ The vertical axis labeled Rate of Return ranges from $0$ to $0\mathrm{.}2.$ There are two lines in the graph. The S M L proxy line passes through $(0,0\mathrm{.}06)$ and $(2,0\mathrm{.}06).$ The S M L true line passes through $(0,0\mathrm{.}05)$ and $(2,0\mathrm{.}25).$

C$.$

The graph titled Security Market Line shows the relationship between the expected rate of return on an asset and its systematic risk, as measured by beta. The horizontal axis labeled Beta ranges from $0$ to $2.$ The vertical axis labeled Rate of Return ranges from $0$ to $0\mathrm{.}2.$ There are two lines in the graph. The S M L proxy line passes through $(0,0\mathrm{.}09)$ and $(2,0\mathrm{.}25).$ The S M L true line passes through $(0,0\mathrm{.}04)$ and $(2,0\mathrm{.}28).$

D$.$

The graph titled Security Market Line shows the relationship between the expected rate of return on an asset and its systematic risk, as measured by beta. The horizontal axis labeled Beta ranges from $0$ to $2.$ The vertical axis labeled Rate of Return ranges from $0$ to $0\mathrm{.}2.$ There are two lines in the graph. The S M L proxy line passes through $(0,0\mathrm{.}06)$ and $(2,0\mathrm{.}06).$ The S M L true line passes through $(0,0\mathrm{.}03)$ and $(2,0\mathrm{.}29).$

Rader Tire has the following results for the last six periods. Calculate and compare the betas using each index. Do not round intermediate calculations. Round your answers to three decimal places.

RATES OF RETURN

Period Rader Tire $(\%)$ Proxy Specific Index $(\%)$ True General Index $(\%)$

$1271112$

$215814$

$3-12-11-6$

$4151315$

$5202130$

$6-7-120$

$\backslash$beta using proxy:

$\backslash$beta using true:

If the current period return for Rader Tire is $13$ percent, are superior results being obtained using either the proxy or the true index beta? Do not round intermediate calculations. Round your answers to two decimal places.

E$($RR$)$using proxy:

$\%$

E$($RR$)$using true:

$\%$

Rader$$s performance would be

$-$Select$-$

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