A calculator with a linear regression function

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Reference no: EM131125668

You are given the following set of data:


Historical Rates of Return

Year

NYSE

Stock X

1

-26.5%

-14.0%

2

37.2

23.0

3

23.8

17.5

4

-7.2

2.0

5

6.6

8.1

6

20.5

19.4

7

30.6

18.2

 

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. Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., ^r x ¼ ¯rx; ^rM ¼ ¯rM, and both sX and bX in the future will equal their past values). Also assume 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 that portfolio either Stock X or another stock, Stock Y, which has the same beta as Stock X but a higher standard deviation of returns. Stocks X and Y have the same expected returns: ^r x ¼ ^ry ¼ 10:6%. Which stock should you choose?

Reference no: EM131125668

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