362 words - 2 pages

Tamisha McQuilkin

Unit 4 Assignment

GB550 Financial Management

Dr. Prondzinski

May 17, 2011

24-2

Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of -0.25, and a beta coefficient of -0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of .75, and a beta coefficient of 0.5. Which security is more risky? Why?

Using SML: rA= rrf + (rm – ...view middle of the document...

24-8

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 | 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% |

| σ = 19.6% | 13.8% |

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.

β = 0.62

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.

This graph shows that stock Y’s volatility follows the basic trend of the market (NYSE). The regression line and beta coefficient shows a positive correlation between stock Y and the market with an upward trending regression line and positive beta coefficient of 0.62. Also, the plots of stock Y lie closer to the regression line than the market leading to believe that stock Y is less risky than the other stocks in the market.

c. Suppose the regression lines were exactly as shown by your graph from part b but the scatter of points were more spread out. How would this

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