a. Construct a scatter diagram showing the relationship between returns on Stock Y and the market, and then draw a freehand approximation of the regression line. What is the approximate value of the beta coefficient? If you have a calculator with a linear regression function or a spreadsheet, check the approximate value of beta obtained from the graph.
b. Give a verbal interpretation of what the regression line and the beta coefficient show about Stock Y’s volatility and relative riskiness as compared with those of other stocks.
c. Suppose the scatter of points had been more spread out, but the regression line was exactly where your present graph shows it. How would this effect (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 had been downward sloping and the beta coefficient had been negative. What would this imply about (1) Stock Y’s relative riskiness, (2) its correlation with the market, and (3) its probable riskpremium? |

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