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	0.25	0.03	-0.20
Normal	0.25	0.36	0.14
Irrational exuberance	0.50	0.30	0.46

The market risk premium is 13 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.)

Stock I:

Stock II:

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

Stock I or Stock II?

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.)

Stock I:

Stock II:

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

Stock I or II?

c. Which stock is “riskier”?

Stock I or II?

Answer 1