Consider the following information on Stocks I and II: Calculate the beta and st

Question

Consider the following information on Stocks I and II: Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) Calculate the beta and standard deviation of Stock II. (Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is "riskier"?

Explanation / Answer

a) Stock 1 state probab return stock1 P*R D Square D*P Recession 0.2 0.045 0.009 -0.255 0.013005 normal 0.65 0.345 0.22425 -0.03975 0.001027041 irrational 0.15 0.205 0.03075 -0.23325 0.008160834 Exp return 0.264 Variance 0.022192875 Standard Deviation 14.90% (SQRT of Variance) CAPM : ER= Riskfree+Beta*(RM-RF) B=ER-RF/(RM-RF) B=(.264-.045)/(.115-.045) BETA=                                                 3.13 b) Stock 2 state probab return stock2 P*R D Square D*P Recession 0.2 -0.25 -0.05 -0.178 0.0063368 normal 0.65 0.17 0.1105 -0.0175 0.000199063 irrational 0.15 0.45 0.0675 -0.0605 0.000549038 Exp return 0.128 Variance 0.0070849 Standard Deviation 8.42% (SQRT of Variance) CAPM : ER= Riskfree+Beta*(RM-RF) B=ER-RF/(RM-RF) B=(.128-.045)/(.115-.045) BETA=                                                 1.19

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