eBook

Problem 7-07

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

1. (1) RFR = 0.06; R_M(proxy) = 0.11 (2) R_z = 0.03; R_M(true) = 0.14

   The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 1 .

2. 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 (%)
   1	25		11		12
   2	15		9		12
   3	-12		-7		-6
   4	15		15		20
   5	19		23		27
   6	-8		-11		0

   _{using proxy}:

   _{using true}:

3. If the current period return for the market is 13 percent and for Rader Tire it is 15 percent, are superior results being obtained for either index beta? Do not round intermediate calculations. Round your answers to two decimal places.

   E(R_R)_{using proxy}: %

   E(R_R)_{using true}: %

   Raders performance would be -Select-inferior compared to eithersuperior compared to eithersuperior compared to true and inferior compared to proxysuperior compared to proxy and inferior compared to trueItem 6 .