Question

Consider the following information on Stocks I and II:

		Rate of Return If State Occurs
	Probability of
State of Economy	State of Economy	Stock I	Stock II
Recession	.35	.03	-.23
Normal	.30	.39	.14
Irrational exuberance	.35	.33	.49

The market risk premium is 10 percent, and the risk-free rate is 4.5 percent.

1-a.	What is the beta of each stock? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Beta
Stock I
Stock II

1-b.	Which stock has the most systematic risk?
	Stock I Stock II

2-a.	What is the standard deviation of each stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

	Standard Deviation
Stock I	%
Stock II	%

2-b.	Which one has the most unsystematic risk?
	Stock I Stock II

Answer 1

1-a.Beta of Stock I = (Expected Rate of return - Risk Free) / (Market Rate - Risk Free)

Beta of Stock I = (24.30% - 4.50%) / 10%

Beta of Stock I = 1.98

1-a.Beta of Stock II = (Expected Rate of return - Risk Free) / (Market Rate - Risk Free)

Beta of Stock II = (13.30% - 4.50%) / 10%

Beta of Stock II = 1.27

1-b. Which stock has the most systematic risk

Stock I as it has higher Beta

2- a

Standard Deviation
Stock I	15.81%
Stock II	30.12%

2-b

Stock II has higher unsystematic risk