Question

Consider the following information about Stocks I and II:

State of Economy | Probability of Economy |
Rate of Return if State Occurs Stock I |
Rate of Return if State Occurs Stock II |

Recession | .26 | .06 | - .21 |

Normal | .51 | .18 | .08 |

Irrational exuberance | .23 | .07 | .41 |

The market risk premium is 5 percent, and the risk-free rate is 4 percent. (Do not round intermediate calculations. Enter the standard deviations as a percent and round all answers to 2 decimal places, e.g., 32.16.)

The standard deviation on Stock I's return is (a)_______ percent, and the Stock I beta is (b)_______. The standard deviation on Stock II's return is (c)_______ percent, and the Stock II beta is (d)________ . Therefore, based on the stock's systematic risk/beta, Stock (e)__________ is "riskier".

Answer #1

State of Economy | Probability of Economy(X) | Rate of Return if State Occurs Stock I P(I) |
Rate of Return if State Occurs Stock II P(II) |

Recession | 0.26 | 0.06 | -0.21 |

Normal | 0.51 | 0.18 | 0.08 |

Irrational exuberance | 0.23 | 0.07 | 0.41 |

Expected return E(X)=sum of(x*P(X)) |
12.35% | 8.05% | |

E(X^2) | 0.018587 | 0.053393 | |

Variance=E(X^2)-E(X)^2 |
0.00333475 | 0.04691275 | |

Standard deviation=sqrt(Variance) |
5.77% | 21.66% |

Expected return = risk free rate + beta * market risk premium

a) 5.77%

b)

12.35% = 4% + beta * 5%

=>

beta = 1.67

c) 21.66%

d)

8.05% = 4% + beta * 5%

=>

beta = 0.81

e)

Hence Stock I is riskier since it has high beta/systematic risk

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...

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
0.06
-0.35
-0.25
Normal
0.23
0.29
0.23
Irrational exuberance
0.71
0.39
0.29
The market risk premium is 12 percent, and the risk-free rate
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State of Economy
Stock I
Stock II
Recession
.25
.06
−
.29
Normal
.45
.21
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Irrational exuberance
.30
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4 percent. (Do not round intermediate calculations. Enter
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Rate of Return if State Occurs
State of
Probability of
Economy
State of Economy
Stock I
Stock II
Recession
.30
.09
−
.24
Normal
.45
.16
.11
Irrational exuberance
.25
.10
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The market risk premium is 8 percent, and the risk-free rate is
4 percent. (Do not round intermediate calculations. Enter
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places (e.g., 32.16). Round your beta answers to...

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Rate of Return if State Occurs
State of
Probability of
Economy
State of Economy
Stock I
Stock II
Recession
.30
.05
−
.30
Normal
.45
.22
.10
Irrational exuberance
.25
.05
.50
The market risk premium is 6 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...

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Rate of Return If State Occurs
Probability of
State of Economy
State of Economy
Stock I
Stock II
Recession
.40
.04
-.21
Normal
.30
.28
.14
Irrational exuberance
.30
.22
.38
The market risk premium is 11 percent, and the risk-free rate
is 4 percent.
1-a.
What is the beta of each stock? (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Beta
Stock I
Stock II...

Consider the following information on Stocks I and II:
Rate of Return If State Occurs
Probability of
State of Economy
State of Economy
Stock I
Stock II
Recession
.35
.04
-.20
Normal
.30
.27
.14
Irrational exuberance
.35
.21
.37
The market risk premium is 10 percent, and the risk-free rate
is 4 percent.
1-a.
What is the beta of each stock? (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Beta
Stock I
Stock II...

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Rate of Return if State Occurs
State of Economy
Probability of State of Economy
Stock I
Stock II
Recession
.20
.03
-.22
Normal
.30
.38
.14
Irrational exuberance
.50
.32
.48
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a-2. Which stock has the most...

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State of Economy
Probability of State of Economy
Stock I
Stock II
Recession
.25
.04
-.23
Normal
.30
.30
.14
Irrational exuberance
.45
.24
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State of Economy
Probability of State of Economy
Return of Stock I if State Occurs
Return of Stock II if State Occurs
Recession
0.10
-0.02
-0.20
Normal
0.70
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0.15
International exuberance
?
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