A calculator with a linear regression function

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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