Question

In: Finance

Consider the following information about Stocks I and II: State of Economy Probability of state of...

Consider the following information about Stocks I and II:

State of Economy Probability of state of economy Stock 1 Stock 2
Recession 0.28 0.05 -0.20
Normal 0.53 0.17 0.07
Irrational Exuberance 0.19 0.06 0.40

The market risk premium is 8 percent, and the risk-free rate is 2 percent.

The standard deviation on Stock 1's return is ________ percent, and the Stock 1 beta is _________. The standard deviation on Stock 2's return is ________ percent, and the Stock 2 beta is _________. Therefor, based on the stock's systematic risk/beta, Stock ______ is "riskier"

Solutions

Expert Solution

Calculate the standard deviation and Beta as follows:

Formulas:


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