Systematic versus Unsystematic Risk Consider the following information about Stocks I and II: State of Probability of
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Systematic versus Unsystematic Risk Consider the following information about Stocks I and II:
State of Probability of Rate of Return If State Occurs Economy State of Economy Stock I Stock II Recession .15 .09 .30 Normal .70 .42 .12 Irrational exuberance .15 .26 .44 www.mhhe The market risk premium is 10 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. LO.1
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