Consider the following information on Stocks I and II: State of Economy Probability of State of Economy Rate of...

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Finance

Consider the following information on Stocks I and II:
State of Economy
Probability of
State of Economy
Rate of Return if State Occurs
Stock I
Stock II
Recession
.22
.055
?.27
Normal
.67
.355
.19
Irrational exuberance
.11
.215
.47

The market risk premium is 11.7 percent, and the risk-free rate is4.7 percent.
Requirement 1:
(a)
Calculate the beta and standard deviation of Stock I. (Do not roundintermediate calculations. Enter the standard deviation as apercentage. Round your answers to 2 decimal places (e.g.,32.16).)

Stock I
Beta

Standard deviation
%

(b)
Calculate the beta and standard deviation of Stock II. (Do notround intermediate calculations. Enter the standard deviation as apercentage. Round your answers to 2 decimal places (e.g.,32.16).)

Stock II
Beta

Standard deviation
%

Requirement 2:
(a)
Which stock has the most systematic risk?
(Click to select)Stock IStock II
(b)
Which one has the most unsystematic risk?
(Click to select)Stock IIStock I
(c)
Which stock is “riskier”?

Answer & Explanation Solved by verified expert

3.6 Ratings (357 Votes)

Requirement 21 Stock I has most Systematic Beta See Answer

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Transcribed Image Text

Consider the following information on Stocks I and II:State of EconomyProbability ofState of EconomyRate of Return if State OccursStock IStock IIRecession.22.055?.27Normal.67.355.19Irrational exuberance.11.215.47The market risk premium is 11.7 percent, and the risk-free rate is4.7 percent.Requirement 1:(a)Calculate the beta and standard deviation of Stock I. (Do not roundintermediate calculations. Enter the standard deviation as apercentage. Round your answers to 2 decimal places (e.g.,32.16).)Stock IBetaStandard deviation% (b)Calculate the beta and standard deviation of Stock II. (Do notround intermediate calculations. Enter the standard deviation as apercentage. Round your answers to 2 decimal places (e.g.,32.16).)Stock IIBetaStandard deviation% Requirement 2:(a)Which stock has the most systematic risk?(Click to select)Stock IStock II(b)Which one has the most unsystematic risk?(Click to select)Stock IIStock I(c)Which stock is “riskier”?