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Consider the following information on Stocks I and II
| Consider the following information on Stocks I and II: |
| State of Economy | Probability of State of Economy |
Rate of Return if State Occurs |
|
| Stock I | Stock II | ||
| Recession | .26 | .025 | −.21 |
| Normal | .61 | .325 | .13 |
| Irrational exuberance | .13 | .185 | .41 |
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| The market risk premium is 11.1 percent, and the risk-free rate is 4.1 percent. | |
| a. | Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.) |
| b. | Calculate the beta and standard deviation of Stock II. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.) |
| c. | Which stock has the most systematic risk? |
| d. | Which one has the most unsystematic risk? |
| e. | Which stock is “riskier”? |
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