You are given the following data: From the above data, assume that you calculated Stock X's beta
Question:
From the above data, assume that you calculated Stock X's beta coefficient to be 0.56.
a. 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.
b. Assuming (1) that the situation during Years 1 to 7 is expected to hold true in the future (i.e., r^X = rX; r^M = rM; and both σX and bX in the future will equal their past values), and (2) that Stock X is in equilibrium (i.e., it plots on the Security Market Line), what is the risk-free rate?
c. Plot the Security Market Line.
d. 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, r^X = r^Y = 10.6%. Which stock should you choose?
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Step by Step Answer:
Financial Management Theory and Practice
ISBN: 978-0176517304
2nd Canadian edition
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason