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Fundamental Toys Inc. is looking to expand its stock portfolio. You receive an urgent text message from Bob:
I need you to analyze a Stock X as a possible investment candidate for the company's stock portfolio. The CFO has asked me to make a decision ASAP. I left the data you need on your desk.
Fortunately, Excel has the capability of performing regression analysis with built-in algorithms. This frees the analyst from complicated algebraic formulations and data management.
The following data has been collected to help you run a linear regression between Stock X and the New York Stock Exchange (NYSE) on which Stock X is traded. Use CAPM as the investment decision model.
Data from Bob
Historical Rates of Return
Year
NYSE
Stock X
1
(30%)
(19.0%)
2
32.5
20.5
3
21.6
16.5
4
(9.8)
0.5
5
7.8
9.7
6
22
7
33.5
19.8
(Source: Intermediate Financial Management, Brigham and Davies, 10th edition)
The NYSE is the independent variable, X-axis, which is the proxy market portfolio. Stock X is the dependent variable, Y-axis. Also, assume a market return (NYSE) of 12%, the risk-free rate of 4% and the market return of Stock X of 7.85%.
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