Question 2 (of 5) 2. value 10.00 points Consider the following information about

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Question 2 (of 5) 2. value 10.00 points Consider the following information about Stocks I and II: Rate of Return If State Occurs State of Economy Recession Normal Irrational exuberance Probability of State of Economy Stock II -21 Stock I 26 51 23 06 18 07 08 The market risk premium is 5 percent, and the risk-free rate is 4 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 The standard deviation on Stock Il's return is Therefore, based on the stock's systematic risk/beta, Stock (Click to select) is riskier" percent, and the Stock I beta is percent, and the Stock Il beta is References eBook & Resources Worksheet Learning Objective 13-03 The systematic 0 Type here to search

Explanation / Answer

State

State

Rate of return if state Occurs RMP 5% RF 4% State of economy Probability of state of economy Stock I Stock II Recession 0.26 0.06 -0.21 Normal 0.51 0.18 0.08 Irrational exuberance 0.23 0.07 0.41 For stock I

State

Prob(S) Ret(s) Using CAPM, P(X) X X2 P.X2 2 P.X2-2 Beta = R-RF/ RMP Recession 26% 6% 1.56% 0.36% 0.09% Normal 51% 18% 9.18% 3.24% 1.65% Irrational exuberance 23% 7% 1.61% 0.49% 0.11% 12.35% Sum = 1.86% 1.53% 0.33% ST.dev = sqrt of above 5.77% Beta =       1.67 ST.DEV/Beta =           0.03 For stock II

State

Prob(S) Ret(s) P(X) X X2 P.X2 2 P.X2-2 Recession 26% -21% -5.46% 4.41% 1.15% Normal 51% 8% 4.08% 0.64% 0.33% Irrational exuberance 23% 41% 9.43% 16.81% 3.87% 8.05% Sum = 5.34% 0.65% 4.69% ST.dev = sqrt of above 21.66% Beta =       0.81 ST.DEV/Beta =           0.27 Stock II is riskier based upon systematice risk/Beta

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