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 s 8 percent, and the risk-free rate is 5 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a percent.) The standard deviation on Stock rs return is percent, and the Stock I beta is . The standard deviation on Stock II's return is percent, and the Stock II beta is . Therefore, based on the stock?s systematic risk/beta, Stock is riskier.

Explanation / Answer

Answer

The Standard Deviation on stock I's return is 12.50 percent and the Stock I beta is 1.425 .The Standard Deviation on stock II's return is 31.76 percent and the Stock I beta is 1.0625 . Therefore based on the stocks systematic risk/beta Stock I is riskier

Working

Standard Deviaton of Stock I =( Sum of P*(x - Expected Return)^2)^(1/2)

Standard Deviaton of Stock I = 156.24^(1/2)

Standard Deviaton of Stock I = 12.50%

Standard Deviaton of Stock II =( Sum of P*(x - Expected Return)^2)^(1/2)

Standard Deviaton of Stock II = 1008.75^(1/2)

Standard Deviaton of Stock II = 31.76%

Expected Return of Stock I = 16.40%

Expected Return of Stock II =13.50%

As per CAPM

Beta of Stock I =( Expected Return of Stock I -Risk free Rate)/Market risk Premium

Beta of Stock I = (16.40 - 5)/8

Beta of Stock I = 1.425

Beta of Stock II =( Expected Return of Stock I -Risk free Rate)/Market risk Premium

Beta of Stock II = (13.50 - 5)/8

Beta of Stock II = 1.0625

Stock I State of Economy Probability Rate of Return p X px P*(x - Expected Return)^2 Recession 0.25 2.00 0.50 51.84 Normal 0.45 30.00 13.50 83.23 Irrational exuberance 0.30 8.00 2.40 21.17 Expected Return = 16.400                                         156.24 Stock II State of Economy Probability Rate of Return p X px P*(x - Expected Return)^2 Recession 0.25 -33.00 -8.25 540.56 Normal 0.45 13.00 5.85 0.11 Irrational exuberance 0.30 53.00 15.90 468.08 Expected Return = 13.500                                      1,008.75

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.