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

Consider the following information on Stock I and Stock II

State of Economy Probability of State of Economy Rate of Return if State Occurs
Stock I Stock II
Recession 0.25 0.05 -0.18
Normal 0.50 0.19 0.14
Boom 0.25 0.13 0.29

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

Required:

  1. Calculate the Expected Return of Stock I. (1 mark)
  2. Calculate the Standard Deviation of Stock I. (1 mark)
  3. Calculate the Expected Return of Stock II. (1 mark)
  4. Calculate the Standard Deviation of Stock II. (1 mark)
  5. Find out the Beta of Stock I. (2 marks)
  6. Find out the Beta of Stock II. (2 marks)
  7. Which stock has the most systematic risk? (2 marks)
  8. Which one has the most unsystematic risk? (2 marks)
  9. Which stock is "riskier" and why? (3 marks)

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