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Consider the following information about Stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I

Consider the following information about Stocks I and II:

State of Economy Probability of State of Economy Rate of Return if State Occurs

Stock I Stock II

Recession .30 .04 .19

Normal .50 .16 .06

Irrational exuberance .20 .05 .39

The market risk premium is 8 percent, and the risk-free rate is 5 percent.

State of Economy	Probability of State of Economy	Rate of Return if State Occurs

Stock I	Stock II
Recession	.30	.04	.19
Normal	.50	.16	.06
Irrational exuberance	.20	.05	.39

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