Reference no: EM132386296

Characteristic Line and Security Market Line

You are given the following set of data:

    HISTORICAL RATES OF RETURN

Year       NYSE          Stock X

1 - 26.5% - 21.0%

2   37.2    18.0   

3   23.8    15.0   

4   - 7.2    3.0   

5   6.6    9.7   

6   20.5    16.9   

7   30.6    15.4   

Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Round your answer to two decimal places.

Beta =

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. Round your answers to two decimal places.

Stock X             NYSE        

Average return % %

Standard deviation, σ % %

Assume that the situation during Years 1 to 7 is expected to prevail in the future (i.e., , , and both σ_x and b_x 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? Round your answer to two decimal places.