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Question: You are given the following set of

You are given the following set of data:
You are given the following set of data:

a. Construct a scatter diagram showing the relationship between returns on Stock Y and the market. Use a spreadsheet or a calculator with a linear regression function to estimate beta.
b. Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y’s 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 plot of points was more spread out. How would this affect: 
(1) the firm’s 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’s relative risk, 
(2) its correlation with the market, and 
(3) its probable risk premium?

a. Construct a scatter diagram showing the relationship between returns on Stock Y and the market. Use a spreadsheet or a calculator with a linear regression function to estimate beta. b. Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y’s 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 plot of points was more spread out. How would this affect: (1) the firm’s 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’s relative risk, (2) its correlation with the market, and (3) its probable risk premium?





Transcribed Image Text:

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 -26.5 -15.3 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% %3D o = 19.6% 13.8%



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