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Consider the following information about Stock Tea and Stock Scone: Return if State Occurs State of Economy Probability of State Tea Scone Boom 30% 34.0%
Consider the following information about Stock Tea and Stock Scone: Return if State Occurs State of Economy Probability of State Tea Scone Boom 30% 34.0% 32.0% Normal 55% 11.0% 13.0% Bust 15% -9.0% -6.0% Also note that the risk-free rate is 0.9% and the market risk premium is 8%. Calculate the expected return, volatility, and beta of each stock, assuming CAPM holds. Stock Tea Stock Scone E(R): E(R): Volatility: Volatility: Beta: Beta: Which stock has higher systematic risk? Which stock has higher unsystematic risk? How do you know (explain)? Higher Systematic Risk: Higher Unsystematic risk
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