to earn 11% in excess of the risk- free rate, what must be the risk premium on the market portfolio? 13. A stock recently has been estimated to have a beta of 1.24: a. What will Merrill Lynch compute as the "adjusted beta" of this stock? b. Suppose that you estimate the following regression describing the evolution of beta over time:   t .3 .7 t 1   What would be your predicted beta for next year? 14. When the annualized monthly percentage rates of return for a stock market index were regressed against the returns for ABC and XYZ stocks over the period 1992-2001 in an ordinary least squares regression, the following results were obtained:     Statistic ABC XYZ   Alpha 3.20% 7.3% Beta 0.60 0.97 R 2 0.35 0.17 Residual standard deviation 13.02% 21.45%     Explain what these regression results tell the analyst about risk-return relationships for each stock over the 1992-2001 period. Comment on their implications for future risk- return relationships, assuming both stocks were included in a diversified common stock portfolio, especially in view of the following additional data obtained from two bro- kerage houses, which are based on two years of weekly data ending in December 2001.     Brokerage House Beta of ABC Beta of XYZ   A .62 1.45 B .71 1.25     15. Based on current dividend yields and expected growth rates, the expected rates of re- turn on stocks A and B are 11% and 14%, respectively. The beta of stock A is .8, while that of stock B is 1.5. The T-bill rate is currently 6%, while the expected rate of return on the S&P 500 index is 12%. The standard deviation of stock A is 10% annually, while that of stock B is 11%. a. If you currently hold a well-diversified portfolio, would you choose to add either of these stocks to your holdings? III. Equilibrium In Capital Markets 10. Single−Index and Multifactor Models The McGraw−Hill Companies, 2001