Question: Consider Asset A and B, which asset has higher systematic risk? Which one has higher total risk? Show your calculations. Assume the market risk premium

  1. Consider Asset A and B, which asset has higher systematic risk? Which one has higher total risk? Show your calculations. Assume the market risk premium is 8 percent, the risk-free rate is 4 percent, and the capital asset pricing model holds. (Rounding your answers to four decimal places) (13 marks)

State of Economy

Probability of State of Economy

Rate of Return if State Occurs

Asset A

Asset B

Recession

0.10

0.02

-0.25

Normal

0.70

0.25

0.09

Irrational exuberance

0.20

0.05

0.40

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