5.Systematic versus Unsystematic Risk [LO3]

Consider the following information on Stocks I and II:

Rate of Return if State Occurs

State of Economy Probability of State of

Economy Stock I Stock II

Recession .25 .11 -.40

Normal .50 .29 .10

Irrational exuberance .25 .13 .56

The market risk premium is 8 percent, and the risk-free rate is 4 percent.

For standard deviations: (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16.))

For betas: (Round your answers to 2 decimal places. e.g., 32.16.)

The standard deviation on Stock I's expected return is ___percent, and the Stock I beta is ___. The standard deviation on Stock II's expected return is ___percent, and the Stock II beta is ___. Therefore, based on the stocks' systematic risk/beta, Stock I is "riskier".