Question

Consider the following information on Stocks I and II: |

Rate of Return if State Occurs | |||||||||

State of | Probability of | ||||||||

Economy | State of Economy | Stock I | Stock II | ||||||

Recession | .28 | .05 | − | .20 | |||||

Normal | .53 | .17 | .07 | ||||||

Irrational exuberance | .19 | .06 | .40 | ||||||

The market risk premium is 8 percent, and the risk-free rate is
2 percent. (Do not round intermediate calculations. Enter
your standard deviation answers as a percent rounded to 2 decimal
places (e.g., 32.16). Round your beta answers to 2 decimal places
(e.g., 32.16).) |

The standard deviation on Stock I's expected return is percent, and the Stock I beta is . The standard deviation on Stock II's expected return is percent, and the Stock II beta is . Therefore, Stock (Click to select) I II is "riskier" |

Answer #1

Expected return of Stock I=0.28*0.05+0.53*0.17+0.19*0.06=0.1155

Standard deviation of Stock I=sqrt(0.28*(0.05-0.1155)^2+0.53*(0.17-0.1155)^2+0.19*(0.06-0.1155)^2)=0.057971976

Beta of Stock I=(11.55%-2%)/8%=1.19375

Expected return of Stock II=0.28*(-0.20)+0.53*0.07+0.19*0.40=0.0571

Standard deviation of Stock II=sqrt(0.28*(-0.20-0.0571)^2+0.53*(0.07-0.0571)^2+0.19*(0.40-0.0571)^2)=0.202327927

Beta of Stock II=(5.71%-2%)/8%=0.46375

The standard deviation on Stock I's expected return is 5.7971976 percent, and the Stock I beta is 1.19375

The standard deviation on Stock II's expected return is
20.2327927 percent, and the Stock II beta is 0.46375

Therefore, Stock II is "riskier"

Consider the following information on Stocks I and II:
Rate of Return if State Occurs
State of
Probability of
Economy
State of Economy
Stock I
Stock II
Recession
.25
.06
−
.29
Normal
.45
.21
.09
Irrational exuberance
.30
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4 percent. (Do not round intermediate calculations. Enter
your standard deviation answers as a percent rounded to 2 decimal
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Consider the following information on Stocks I and II:
Rate of Return if State Occurs
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State of Economy
Stock I
Stock II
Recession
.30
.05
−
.30
Normal
.45
.22
.10
Irrational exuberance
.25
.05
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2 percent. (Do not round intermediate calculations. Enter
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State of Economy
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Stock II
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.30
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STOCK II
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0.06
-0.35
-0.25
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Stock I
Rate of Return if State Occurs
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.26
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Normal
.51
.18
.08
Irrational exuberance
.23
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Probability of
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State of Economy
Stock I
Stock II
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.20
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.30
Normal
.55
.320
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Irrational exuberance
.25
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State of Economy
Probability of State of Economy
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Stock II
Recession
.20
.03
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Normal
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Irrational exuberance
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Stock I
Stock II
Recession
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Stock II
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