Systematic versus Unsystematic Risk Consider the following information about Equities I and II:

Rate of return if state occurs State of economy Probability of state of economy Equity I Equity II Recession 0.15 0.09 −0.30 Normal 0.70 0.42 0.12 Irrational exuberance 0.15 0.26 0.44 The market risk premium is 10 per cent, and the risk-free rate is 4 per cent. Compute the βi and standard deviation of security I. Compute the βi and standard deviation of security II. Which equity is ‘riskier’? Explain.