You are given the following set of data:
Historical Rates of Return
Year NYSE Stock Y
1 4.0% 3.0%
2 14.3 18.2
3 19.0 9.1
4 -14.7 -6.0
5 -26.5 -15.3
6 37.2 33.1
7 23.8 6.1
8 -7.2 3.2
9 6.6 14.8
10 20.5 24.1
11 30.6 18.0
Mean=9.8% 9.8%
o=19.6% 13.8%
a. Construct a scatter diagram showing the relationship between returns on Stock Y and the market. Use a spreadsheet or calculator with a
linear regression function to estimate beta.
b. Give a verbal interpretation of what the regression line and beta coefficient show about Stock Y%u2019s volatility and relative risk as
compared with those of other stocks.
c. Suppose the regression line were exactly as shown by your graph from part b but the scatter of points were more spread out. How would this
affect (1) the firm%u2019s risk if the stock is held in a one-asset portfolio and (2) the actual risk premium on the stock if the CAPM holds exactly?
d. Suppose the regression line were downward sloping and the beta coefficient were negative. What would this imply about (1) Stock Y%u2019s
relative risk (2) its correlation with the market and (3) its probable risk premium?