Q. a. Use a spreadsheet (or a calculator with a linear regression function) to find out Stock X's beta coefficient.

b. Find out 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), illustrate 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