Question: Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: State of Economy Probability of State of Economy Rate

Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession .25 .08 .23 Normal .45 .20 .10 Irrational exuberance .30 .09 .43 The market risk premium is 8 percent, and the risk-free rate is 6 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.)

State of Economy	Probability of State of Economy	Rate of Return if State Occurs

		Stock I	Stock II
Recession	.25	.08	.23
Normal	.45	.20	.10
Irrational exuberance	.30	.09	.43

The standard deviation on Stock I's return is			percent, and the Stock I beta is		. The standard
deviation on Stock II's return is		percent, and the Stock II beta is		. Therefore, based on the
stock's systematic risk/beta, Stock	I	is "riskier".

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