You are given the following data:

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?

Historical Rates of Return NYSE (26.5) % 37.2 23.8 (7.2) Year Stock X (14.0)% 23.0 17.5 2.0 8.1 19.4 18.2 6.6 20.5 30.6