Question: Problem. Consider the following information on Stocks 1 and 2 : State of economy Probability of state return return stock1 stock2 Recession 0.25 0.04 -0.22

Problem. Consider the following information on Stocks 1 and 2 :

State of economy Probability of state return return
stock1 stock2
Recession 0.25 0.04 -0.22
Normal 0.60 0.22 0.15
Boom 0.15 0.16 0.45

The market risk premium is 7%, and the risk-free rate is 4%. Which stock has more systematic risk?

Which one has more unsystematic risk? Which stock is 'riskier' ? Explain.

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