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Consider the following information on Stocks A and B: State of Economy Probability of Rate of Return if State Occurs State of Economy Stock A

  1. Consider the following information on Stocks A and B:

State of Economy

Probability of

Rate of Return if State Occurs

State of Economy

Stock A

Stock B

Recession

0.30

2%

-5%

Boom

0.70

15%

12%

The market risk premium is 7%, and the risk-free rate is 4%.

  1. Which stock has more systematic risk? Use the calculation to support your answer.
  2. Which stock has more total risk? Use the calculation to support your answer.

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