Question

Consider the following information on Stocks I and II:

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock I	Stock II
Recession	0.45	0.03	-0.19
Normal	0.25	0.35	0.14
Irrational exuberance	0.30	0.29	0.45

The market risk premium is 12 percent and the risk-free rate is 6 percent.

a-1. What is the beta of each stock? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Beta
Stock I
Stock II

a-2. Which stock has the most systematic risk?

O Stock 1

O Stock 2

b-1. What is the standard deviation of each stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Standard Deviation

Stock I% _________

Stock II% ________

b-2. Which one has the most unsystematic risk?

O Stock 1

O Stock 2

c. Which stock is “riskier”?

O Stock 1

O Stock 2

Answer 1