Question: You are given this information on stock D & E State of economy Probability of state of economy Rate of return if state occurs (stock

You are given this information on stock D & E

State of economy Probability of state of economy

Rate of return if state occurs

(stock D)

Rate of return if state occurs

(stock E)
Recession 25.00% 2.00% -20.00%
Normal 60.00% 32.00% 12.00%
Boom 15.00% 18.00% 40.00%

Market risk premium 7.00%

Risk-free rate 4.00%

Calculate the following for stocks D & E

Stock D Stock E
Expected return
Beta
Variance
Standard deviation

Answer the following questions

Which stock has the more total risk? Stock D or E?
Which stock has the more systematic risk? Stock D or E?
Which stock has higher risk premium? Stock D or E ?

Explain you answers above what is meant by total risk, systematic risk, and risk premium?

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