A calculator with a linear regression function

Assignment Help Finance Basics
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?

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