Consider the following information about Stocks I and II: The market risk premiu

Question

Consider the following information about Stocks I and II: The market risk premium is 5 percent, and the risk-free rate is 4 percent. (Round your answers to 2 decimal places, (e.g., 32.16)) The market risk premium is 5 percent, and the risk-free rate is 4 percent. (Round your answers to 2 decimal places, (e.g., 32.16)) The standard deviation on Stock I's return is percent, and the Stock I beta is The standard deviation on Stock Il's return is | percent, and the Stock II beta is Therefore, based on the stock's systematic risk/beta. Stock (Click to select) is "riskier".

Explanation / Answer

Returns (R) pi*(Ri-r)2 State of Economy Probability(pi) Stock A Stock B Stock A Stock B Recession 0.2 0.09 -0.26 0.00072 0.0285768 Normal 0.6 0.18 0.13 0.00054 8.64E-05 Irrational 0.2 0.12 0.46 0.00018 0.0233928 0.00144 0.052056 Standard deviation= 3.79% 22.82% Estimated Stock Returns(r) = 15.00% 11.80% Stock Beta = 2.2 1.56 Stock A is riskier based on beta.

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