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##### 3.7 a. Use a spreadsheet (or a calculator with a...

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3.7 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. Assuming (1) that the situation during Years 1 to 7 is expected to hold true in the future (that is, rX = rX rM = rM; and both oX and bX in the future will equal their past values), and (2) 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 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 rX = rY = 10.6%. Which stock should you choose? Year NYSE Stock C 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

Paper#10099 | Written in 18-Jul-2015

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