(1) Explain some of the key differences between standard deviation and beta (2 marks) (2) Consider the following information about Stocks A and B State of Economy Probability of State of Economy Stock A Stock B Boom 0 25 0 06 0 44 Normal 0 50 0 21 0 09 Recession 0 25 0 02 0 25 The market risk premium is 8 percent, and the risk free rate is 4 percent Which stock has the most systematic risk Which one has the most unsystematic risk Which stock is riskier Fully explain the rationale behind your argument (8 marks)

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Question: (1) Explain some of the key differences between standard deviation and beta. (2 marks) (2) Consider the following information about Stocks A and B: State

(1) Explain some of the key differences between standard deviation and beta. (2 marks)

(2) Consider the following information about Stocks A and B:

State of Economy	Probability of State of Economy	Stock A	Stock B
Boom	0.25	0.06	0.44
Normal	0.50	0.21	0.09
Recession	0.25	0.02	-0.25

The market risk premium is 8 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is riskier? Fully explain the rationale behind your argument. (8 marks)

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