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 riskfree rate is 4 percent. 
1a. 
What is the beta of each stock? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 
Beta  
Stock I  
Stock II  
1b. 
Which stock has the most systematic risk? 


2a. 
What is the standard deviation of each stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) 
Standard Deviation  
Stock I  % 
Stock II  % 
2b.  Which one has the most unsystematic risk?  

3.  Which stock is “riskier”?  

Rate of return for stock1
=probability*stock return
=0.35*.04+.30*.27 + .35*0.21
=16.85%
Rate of return for stock2
=probability*stock return
=0.35*.2+.30*.14 + .35*0.37
=10.15%
Stock1
Using CAPM model
rate of return =rf+b*Market risk premium
16.85 = 4+b*10
b= 1.29
Stock2
Using CAPM model
rate of return =rf+b*Market risk premium
10.15 = 4+b*10
b= 0.62
part b)
stock 1 beta is higher so it has more systematic risk
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