Consider the following information about stocks I and II:

		Rate of return if state occurs
State of economy	Probability of state of economy	Stock I	Stock II
Recession	0.15	-0.02	-0.20
Normal	0.55	0.08	0.10
Boom	0.30	0.22	0.25

The market risk premium is 8 percent, and the risk-free rate is 2 percent.

a) Which stock has more systematic risk? Which stock has more total risk? Assume both stock are correctly priced. Show your work.

b) Compute the variance of a portfolio that is 40% invested in stock I and 60% invested in stock II.