Question

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 is 4.7 percent.

Requirement 1:
(a)
Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percentage. 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 not round intermediate calculations. Enter the standard deviation as a percentage. 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 1

Requirement 2:

1. Stock I has most Systematic Beta because it has More Beta

2. Stock I has most unsystematic risk because it has more risk computed below

Stock I Unsystematic Risk = 15.09% - 1.94% = 13.15%
Stock II Unsystematic Risk = 8.72% - 0.62% = 8.09%
C. Which stock is riskier? Stock I