Question

Consider the following information on Stocks I and II: Rate of Return if State Probability of Occurs State of State of Economy Economy Stock! Stock II Recession .27 .030 --22 Normal .62 .330 .14 Irrational .11 .190 42 exuberance The market risk premium is 11.2 percent, and the risk-free rate is 4.2 percent. a. Calculate the beta and standard deviation of Stock I. (Do not round Intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e... 32.18.) b. Calculate the beta and standard deviation of Stock II. (Do not round Intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.) c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskier"? % % a. Beta Standard deviation b. Beta Standard deviation c. Most systematic risk Most unsystematic d. risk e. "Riskier" stock

Answer 1

1.
=(0.27*0.03+0.62*0.33+0.11*0.19-4.2%)/11.2%=1.71071428571429

2.
=SQRT(0.27*(0.03-(0.27*0.03+0.62*0.33+0.11*0.19))^2+0.62*(0.33-(0.27*0.03+0.62*0.33+0.11*0.19))^2+0.11*(0.19-(0.27*0.03+0.62*0.33+0.11*0.19))^2)=13.1007786028159%

3.
=(0.27*(-0.22)+0.62*0.14+0.11*0.42-4.2%)/11.2%=0.282142857142857

4.
=SQRT(0.27*(-0.22-(0.27*(-0.22)+0.62*0.14+0.11*0.42))^2+0.62*(0.14-(0.27*(-0.22)+0.62*0.14+0.11*0.42))^2+0.11*(0.42-(0.27*(-0.22)+0.62*0.14+0.11*0.42))^2)=19.8007676618862%

5.
Stock I

6.
Stock II

7.
Stock II