Consider the following information on Stock I and Stock II State of Economy Probability of State of
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Question:
Consider the following information on Stock I and Stock II
| State of Economy | Probability of State of Economy | Rate of Return if State Occurs | |
| Stock I | Stock II | ||
| Recession | 0.25 | 0.05 | -0.18 |
| Normal | 0.50 | 0.19 | 0.14 |
| Boom | 0.25 | 0.13 | 0.29 |
The market risk premium is 8 percent, and the risk-free rate is 5 percent.
Required:
- Calculate the Expected Return of Stock I. (1 mark)
- Calculate the Standard Deviation of Stock I. (1 mark)
- Calculate the Expected Return of Stock II. (1 mark)
- Calculate the Standard Deviation of Stock II. (1 mark)
- Find out the Beta of Stock I. (2 marks)
- Find out the Beta of Stock II. (2 marks)
- Which stock has the most systematic risk? (2 marks)
- Which one has the most unsystematic risk? (2 marks)
- Which stock is "riskier" and why? (3 marks)
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