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5. Consider the following information about Stocks I and II: Economy Recession Normal Irrational exuberance Probability Stock I 0.25 0.02 0.50 0.21 0.25 0.06

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5. Consider the following information about Stocks I and II: Economy Recession Normal Irrational exuberance Probability Stock I 0.25 0.02 0.50 0.21 0.25 0.06 Return Stock II -0.25 0.09 0.44 The market risk premium is 7%, and the risk-free rate is 4%. The market is in equilibrium. a. Which stock has more systematic risk? (5 marks) b. Which one has more unsystematic risk? Which stock is "riskier"? Explain. (5 marks)

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