Systematic versus Unsystematic Ris k Consider the following information about Stocks I and II:

State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession .15 .11 −.25 Normal .55 .18 .11 Irrational exuberance .30 .08 .31 The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk?

Which stock is “riskier”? Explain.