Background info: rr if state occurs State of the economy Probability of state of
ID: 2677398 • Letter: B
Question
Background info:rr if state occurs
State of the economy Probability of state of econ Stock 1 Stock 2
Recession .25 .02 -.20
Normal .60 .32 .12
Irrational exuberance .15 .18 .40
The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply:
Stock II has more risk than Stock I
Stock II has less systematic risk than Stock I
Stock I has a higher risk premium than Stock II
Stock I has a greater expected return than Stock II
Explanation / Answer
Stock I has a higher risk premium than Stock II
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