The market risk premium is 5 percent, and the risk-free rate is 3 percent. (Do n
ID: 2725391 • Letter: T
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The market risk premium is 5 percent, and the risk-free rate is 3 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 I's 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 (Click to select)I or II is "riskier".
Consider the following information about Stocks I and II:Explanation / Answer
Economic condition Probability =P Stock I return =R1 Expected Return Stock 1=P*R1 Mean Return Stock 1=Rm1 P*(Rm1-R1)^2 Stock I return =R2 Expected Return Stock 2 Mean Return Stock 1=Rm2 P*(Rm2-R2)^2 Recession 0.26 5.00% 1.30% 13.5% 0.001879 -31% -8.06% 9.68% 0.043026 Normal 0.50 22.00% 11.00% 13.5% 0.003613 11% 5.50% 9.68% 0.000087 Irrational Exuberance 0.24 5.00% 1.20% 13.5% 0.001734 51% 12.24% 9.68% 0.040976 Total 13.50% 0.007225 9.68% 0.08409 Stock I Stock II Expected return 13.50% 9.68% Variance = 0.007225 0.084090 Std deviation =Sq Root Variance= 8.50% 29.00% Risk Free rate 3% 3% Marker Risk premium 5% 5% Beta =(Expected Return-Risk free rate)/Market Risk Premium= 2.10 1.34 So based on Beta , stock I is riskier.
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