Characteristic Line and Security Market Line
You are given the following set of data:
| | HISTORICAL RATES OF RETURN |
| Year | Â Â Â Â Â NYSE | Â Â Â Â Â Â Â Â StockX |
| 1 | | - 26.5% | | - 17.0% |
| 2 | | 37.2Â Â Â | | 16.0Â Â Â |
| 3 | | 23.8Â Â Â | | 14.0Â Â Â |
| 4 | | - 7.2Â Â Â | | 5.0Â Â Â |
| 5 | | 6.6Â Â Â | | 9.9Â Â Â |
| 6 | | 20.5Â Â Â | | 19.4Â Â Â |
| 7 | | 30.6Â Â Â | | 17.9Â Â Â |
- Use a spreadsheet (or a calculator with a linear regressionfunction) to determine Stock X's beta coefficient. Round youranswer to two decimal places.
Beta =
- Determine the arithmetic average rates of return for Stock Xand the NYSE over the period given. Calculate the standarddeviations of returns for both Stock X and the NYSE. Round youranswers to two decimal places.
| Â Â | StockXÂ Â Â Â Â Â Â Â | Â Â | NYSEÂ Â Â Â Â Â Â Â |
| Average return, | | % | | % |
| Standard deviation, σ | | % | | % |
- Assume that the situation during Years 1 to 7 is expected toprevail in the future and both σx and bx inthe future will equal their past values). Also, assume that Stock Xis in equilibrium - that is, it plots on the Security Market Line.What is the risk-free rate? Round your answer totwo decimal places.
%
